NEW ISSUE

In the opinion of Bond Counsel, interest on the Bonds will be exempt from personal income taxes imposed by the State of New York or any political subdivision thereof, including The City of New York (the ‘‘City’’), and assuming continuing compliance with the provisions of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), as described herein, interest on the Tax-Exempt Bonds will not be includable in the gross income of the owners thereof for federal income tax purposes. See ‘‘SECTION IX: OTHER INFORMATION—Tax Exemption’’ herein for further information. Interest on the Taxable Bonds will be includable in gross income for federal income tax purposes. $947,960,000 The City of New York

General Obligation Bonds, Fiscal 2005 Series O, P and Q $853,135,000 Tax-Exempt Bonds $94,825,000 Taxable Bonds

Dated: Date of Delivery Due: As shown on the inside cover pages

The Bonds will be issued as registered bonds. The Bonds will be registered in the nominee name of The Depository Trust Company, New York, New York, which will act as securities depository for the Bonds. Interest on the Bonds will be payable as shown on the inside cover pages. The Bonds can be purchased in principal amounts of $5,000 or any integral multiple thereof. Other terms of the Bonds including redemption provisions are described herein. A detailed schedule of the Bonds is set forth on the inside cover pages. The Tax-Exempt Bonds are offered subject to prior sale, when, as and if issued by the City and accepted by the Underwriters. The Taxable Bonds are being sold by public letting on the basis of electronic, competitive bids in accordance with the Notice of Sale dated May 12, 2005, as supplemented. The issuance of the Bonds is subject to the approval of the legality of the Bonds by Sidley Austin Brown & Wood LLP, New York, New York, Bond Counsel to the City, and certain other conditions. Certain legal matters in connection with the preparation of this Official Statement will be passed upon for the City by Willkie Farr & Gallagher LLP,New York, New York. Certain legal matters will be passed upon for the Underwriters by Clifford Chance US LLP, New York, New York. It is expected that the Bonds will be available for delivery in New York, New York, on or about June 2, 2005.

Bear, Stearns & Co. Inc. Citigroup Morgan Stanley UBS Financial Services Inc.

M.R. Beal & Company First Albany Capital Inc. Goldman, Sachs & Co. JPMorgan Lehman Brothers Merrill Lynch & Co. Ramirez & Co., Inc. Roosevelt & Cross Incorporated

Advest, Inc./Lebenthal Apex Pryor Securities Banc of America Securities LLC CIBC World Markets Commerce Capital Markets, Inc. RBC Dain Rauscher Inc. A. G. Edwards Jackson Securities Janney Montgomery Scott LLC Legg Mason Wood Walker, Loop Capital Markets, LLC Popular Securities Incorporated Prager, Sealy & Co., LLC Raymond James & Associates, Inc. Wachovia Bank, National Association

May 20, 2005 $690,000,000 General Obligation Bonds, Fiscal 2005 Series O

$650,000,000 Tax-Exempt Bonds $40,000,000 Taxable Bonds Principal Interest Price or Principal Interest Price or June 1 Amount Rate Yield Amount Rate Yield

2007 $ 5,320,000 31⁄2% 2.76% $— —% —% 2007 11,605,000 23⁄4 2.76 — — — 2008 17,440,000 5 2.95 — — — 2009 18,310,000 5 3.15 — — — 2010 21,670,000 5 3.30 — — — 2011 22,755,000 5 3.43 — — — 2012 23,890,000 5 3.58 — — — 2013 10,785,000 5 3.68 14,300,000 4.45 100 2014 11,835,000 5 3.77 14,415,000 4.60 100 2015 16,200,000 5 3.86 11,285,000 4.65 100 2016(1) 24,160,000 5 3.94 2016(1)(2) 4,645,000 5 3.76 2017(1)(2) 30,250,000 5 3.83 2018(1)(2) 31,760,000 5 3.89 2019(1)(2) 9,500,000 5 3.94 2019(1) 23,850,000 5 4.125 2020(1) 35,015,000 5 4.15 2021(1) 36,765,000 5 4.21 2022(1) 38,450,000 5 4.24 2023(1) 40,375,000 5 4.27 2024(1) 19,185,000 5 4.29 2025(1) 20,145,000 5 4.31

2027(3)(4) 42,265,000 43⁄8 100.2

2030(1)(4) 69,255,000 5 4.39

2033(1)(4) 61,380,000 5 4.41

2035(4) 3,190,000 43⁄8 4.44

(1) Priced to first par call on June 1, 2015. (2) Insured by Financial Security Assurance Inc. (3) Insured by Ambac Assurance Corporation. (4) Term Bond.

Interest on the Series O Bonds is payable on each June 1 and December 1 commencing December 1, 2005. $182,385,000 General Obligation Bonds, Fiscal 2005 Series P Tax-Exempt Bonds Principal Interest Price or August 1 Amount Rate Yield 2006 $ 7,675,000 4 % 2.85% 2007 7,190,000 23⁄4 2.76 2008 2,320,000 5 2.95 2008 5,205,000 27⁄8 2.95 2009 7,815,000 3 3.15 2010 7,890,000 31⁄4 3.30 2011 3,855,000 5 3.43 2011 4,085,000 33⁄8 3.43 2012 8,900,000 31⁄2 3.58 2013 7,330,000 5 3.68 2013 1,945,000 3.60 3.68 2014(1) 3,655,000 5 3.59 2014(1) 6,000,000 31⁄2 3.59 2015(1) 6,875,000 5 3.68 2015(1) 3,175,000 3.60 3.68 2016(1)(2) 8,385,000 5 3.76 2016(1) 2,290,000 33⁄4 3.76 2017 11,145,000 4 4.03 2018(1)(2) 9,825,000 5 3.89 2018(1) 1,765,000 3.80 3.89 2019(2) 9,350,000 5 4.125 2019 2,870,000 41⁄8 100 2020(2) 7,875,000 5 4.15 2020 1,295,000 41⁄8 4.15 2021(2) 9,410,000 5 4.21 2021 200,000 4.20 4.21 2022(2) 9,465,000 5 4.24 2022 885,000 4.20 4.24 2023(2) 10,640,000 5 4.27 2023 20,000 41⁄4 4.27 2024(2) 3,485,000 5 4.29 2024 255,000 41⁄4 4.29 2025(2) 3,135,000 5 4.31 2025 930,000 41⁄4 4.31

2028(2)(3) 4,615,000 5 4.375 2028 630,000 43⁄8 100

(1) Insured by MBIA Insurance Corporation. (2) Priced to first par call on August 1, 2015. (3) Term Bond. Interest on the Series P Bonds is payable on each August 1 and February 1 commencing August 1, 2005. $75,575,000 General Obligation Bonds, Fiscal 2005 Series Q $20,750,000 Tax-Exempt Bonds $54,825,000 Taxable Bonds Principal Interest Price or Principal Interest Price or August 1 Amount Rate Yield Amount Rate Yield

2005 $1,525,000 4 % 2.65% $15,065,000 31⁄2% 3.41% 2006 1,445,000 31⁄2 2.87 18,165,000 4 3.91 2007 1,470,000 23⁄4 2.76 21,595,000 4 100 2008 1,415,000 4 2.95 2009 1,400,000 3 3.15 2010 1,410,000 31⁄4 3.30 2011 1,240,000 5 3.43 2011 835,000 33⁄8 3.43 2012 1,980,000 5 3.58 2013 1,995,000 5 3.68 2014(1) 2,005,000 5 3.59 2015(1) 1,960,000 5 3.68 2015(1) 70,000 3.60 3.68 2016(1)(2) 2,000,000 5 3.76

(1) Insured by MBIA Insurance Corporation. (2) Priced to first par call on August 1, 2015.

Interest on the Series Q Bonds is payable on each August 1 and February 1 commencing August 1, 2005. No dealer, broker, salesperson or other person has been authorized by the City or the Underwriters to give any information or to make any representations in connection with the Bonds or the matters described herein, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City or the Underwriters. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement, nor any sale made hereunder, shall, under any circumstances, create any implication that there has been no change in the matters described herein since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. The Underwriters may offer and sell Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover pages hereof. The offering prices may be changed from time to time by the Underwriters. No representations are made or implied by the City or the Underwriters as to any offering of any derivative instruments. The factors affecting the City’s financial condition are complex. This Official Statement should be considered in its entirety and no one factor considered less important than any other by reason of its location herein. Where agreements, reports or other documents are referred to herein, reference should be made to such agreements, reports or other documents for more complete information regarding the rights and obligations of parties thereto, facts and opinions contained therein and the subject matter thereof. Any electronic reproduction of this Official Statement may contain computer-generated errors or other deviations from the printed Official Statement. In any such case, the printed version controls. This Official Statement contains forecasts, projections and estimates that are based on expectations and assumptions which existed at the time such forecasts, projections and estimates were prepared. In light of the important factors that may materially affect economic conditions in the City, the inclusion in this Official Statement of such forecasts, projections and estimates should not be regarded as a representation by the City, its independent auditors or the Underwriters that such forecasts, projections and estimates will occur. Such forecasts, projections and estimates are not intended as representations of fact or guarantees of results. If and when included in this Official Statement, the words ‘‘expects,’’ ‘‘forecasts,’’ ‘‘projects,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘estimates’’ and analogous expressions are intended to identify forward-looking statements and any such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, litigation and various other events, conditions and circumstances, many of which are beyond the control of the City. These forward-looking statements speak only as of the date they were prepared. The City disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein (except as required by law) to reflect any change in the City’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based between modifications to the City’s financial plan required by law.

OFFICIAL STATEMENT OF THE CITY OF NEW YORK TABLE OF CONTENTS Page Page INTRODUCTORY STATEMENT ...... 1 SECTION VII: FINANCIAL PLAN ...... 29 SECTION I: RECENT FINANCIAL DEVELOPMENTS .... 2 ActionstoClosetheRemainingGaps...... 31 2005-2009 Financial Plan ...... 2 Assumptions...... 31 TheState ...... 4 CertainReports...... 41 SECTION II: THE BONDS ...... 4 Long-Term Capital Program...... 43 General ...... 4 Financing Program ...... 45 Payment Mechanism ...... 4 Seasonal Financing Requirements ...... 46 Enforceability of City Obligations ...... 5 SECTION VIII: INDEBTEDNESS ...... 47 Certain Covenants and Agreements ...... 5 Indebtedness of the City and Certain Other Use of Proceeds ...... 6 Entities ...... 47 Optional Redemption ...... 6 Public Benefit Corporation Indebtedness ...... 51 Mandatory Redemption ...... 6 SECTION IX: OTHER INFORMATION ...... 53 Bond Insurance...... 7 PensionSystems...... 53 Bond Certificates ...... 7 Litigation ...... 54 SECTION III: GOVERNMENT AND FINANCIAL TaxExemption ...... 57 CONTROLS ...... 9 Taxable Bonds ...... 58 Structure of City Government ...... 9 Ratings...... 58 City Financial Management, Budgeting and Controls 10 Legal Opinions ...... 58 SECTION IV: SOURCES OF CITY REVENUES ...... 14 Verification...... 59 RealEstateTax...... 14 Underwriting ...... 59 Other Taxes ...... 17 ContinuingDisclosureUndertaking...... 59 Miscellaneous Revenues ...... 18 Financial Advisors ...... 61 Unrestricted Intergovernmental Aid ...... 19 FurtherInformation...... 61 Federal and State Categorical Grants ...... 20 APPENDIX A—ECONOMIC AND DEMOGRAPHIC SECTION V: CITY SERVICES AND EXPENDITURES .... 21 INFORMATION ...... A-1 Expenditures for City Services ...... 21 APPENDIX B—FINANCIAL STATEMENTS...... B-1 Employees and Labor Relations ...... 22 APPENDIX C—BONDS TO BE REDEEMED ...... C-1 Capital Expenditures ...... 23 APPENDIX D—BOND INSURERS ...... D-1 SECTION VI: FINANCIAL OPERATIONS ...... 24 APPENDIX E—SPECIMEN BOND INSURANCE 2000-2004 Summary of Operations ...... 25 POLICIES ...... E-1 Forecast of 2005 Results ...... 27 APPENDIX F—FORM OF LEGAL OPINION...... F-1 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN MARKET PRICES OF THE BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COM- MENCED, MAY BE DISCONTINUED AT ANY TIME. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN MAKING AN INVESTMENT DECI- SION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THIS OFFICIAL STATEMENT AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. [THIS PAGE INTENTIONALLY LEFT BLANK.] OFFICIAL STATEMENT OF THE CITY OF NEW YORK This Official Statement provides certain information concerning The City of New York (the ‘‘City’’) in connection with the sale of $947,960,000 aggregate principal amount of the City’s General Obligation Bonds, Fiscal 2005 Series O, P and Q (the ‘‘Bonds’’). The Bonds consist of $853,135,000 tax-exempt bonds (the ‘‘Tax-Exempt Bonds’’) and $94,825,000 taxable bonds (the ‘‘Taxable Bonds’’). The Taxable Bonds are to be issued to the original purchasers thereof in accordance with the City’s Notice of Sale, dated May 12, 2005, as supplemented. Reference is made to the Notice of Sale for the terms and conditions of sale and delivery of the Taxable Bonds to be issued to the original purchasers thereof. INTRODUCTORY STATEMENT The Bonds will be general obligations of the City for the payment of which the City will pledge its faith and credit. All real property subject to taxation by the City will be subject to the levy of ad valorem taxes, without limitation as to rate or amount, to pay the principal of, applicable redemption premium, if any, and interest on the Bonds. The City, with a population of approximately 8,000,000, is an international center of business and culture. Its non-manufacturing economy is broadly based, with the banking and securities, life insurance, communications, publishing, fashion design, retailing and construction industries accounting for a significant portion of the City’s total employment earnings. Additionally, the City is a leading tourist destination. Manufacturing activity in the City is conducted primarily in apparel and printing. For each of the 1981 through 2004 fiscal years, the City’s General Fund had an operating surplus, before discretionary and other transfers, and achieved balanced operating results as reported in accordance with then applicable generally accepted accounting principles (‘‘GAAP’’), after discretionary and other transfers. See ‘‘SECTION VI: FINANCIAL OPERATIONS—2000-2004 Summary of Operations.’’ The City has been required to close substantial gaps between forecast revenues and forecast expenditures in order to maintain balanced operating results. There can be no assurance that the City will continue to maintain balanced operating results as required by New York State (‘‘State’’) law without proposed tax or other revenue increases or reductions in City services or entitlement programs, which could adversely affect the City’s economic base. As required by the New York State Financial Emergency Act For The City of New York (the ‘‘Financial Emergency Act’’ or the ‘‘Act’’) and the New York City Charter (the ‘‘City Charter’’), the City prepares a four-year annual financial plan, which is reviewed and revised on a quarterly basis and which includes the City’s capital, revenue and expense projections and outlines proposed gap-closing programs for years with projected budget gaps. The City’s current financial plan projects budget balance in the 2005 and 2006 fiscal years and budget gaps for each of the 2007 through 2009 fiscal years. A pattern of current year balance and projected subsequent year budget gaps has been consistent through the entire period since 1982, during which the City has achieved an excess of revenues over expenditures, before discretionary transfers, for each fiscal year. For information regarding the current financial plan, see ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS’’ and ‘‘SECTION VII: FINANCIAL PLAN.’’ The City is required to submit its financial plans to the New York State Financial Control Board (the ‘‘Control Board’’). For further information regarding the Control Board, see ‘‘SECTION III: GOVERNMENT AND FINANCIAL CONTROLS—City Financial Management, Budgeting and Controls—Financial Review and Oversight.’’ For its normal operations, the City depends on aid from the State both to enable the City to balance its budget and to meet its cash requirements. There can be no assurance that there will not be delays or reductions in State aid to the City from amounts currently projected; that State budgets will be adopted by the April 1 statutory deadline, or interim appropriations will be enacted; or that any such reductions or delays will not have adverse effects on the City’s cash flow or expenditures. See ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS—The State.’’ In addition, the federal budget negotiation process could result in a reduction or a delay in the receipt of federal grants which could have adverse effects on the City’s cash flow or revenues.

1 The Mayor is responsible for preparing the City’s financial plan which relates to the City and certain entities that receive funds from the City, including the financial plan for the 2005 through 2008 fiscal years submitted to the Control Board on June 29, 2004 (the ‘‘June Financial Plan’’), Modification No. 05-3 to the June Financial Plan and the Mayor’s Executive Budget for the 2006 fiscal year and financial plan for the 2006 through 2009 fiscal years submitted to the Control Board on May 9, 2005 (together, the ‘‘2005-2009 Financial Plan’’ or ‘‘Financial Plan’’). The City’s projections set forth in the Financial Plan are based on various assumptions and contingencies which are uncertain and which may not materialize. Such assumptions and contingencies are described throughout this Official Statement and include the condition of the regional and local economies, the provision of State and federal aid, the impact on City revenues and expenditures of any future federal or State policies affecting the City and the cost of future labor settlements. See ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’ Implementation of the Financial Plan is dependent upon the City’s ability to market its securities successfully. Implementation of the Financial Plan is also dependent upon the ability to market the securities of other financing entities, including the New York City Municipal Water Finance Authority (the ‘‘Water Authority’’) which issues debt secured by water and sewer revenues. See ‘‘SECTION VII: FINANCIAL PLAN—Financing Program.’’ In addition, the City may issue revenue and tax anticipation notes to finance its seasonal working capital requirements. The success of projected public sales of City, Water Authority and other bonds and notes will be subject to prevailing market conditions. Future developments concerning the City and public discussion of such developments, as well as prevailing market conditions, may affect the market for outstanding City general obligation bonds and notes. The City Comptroller and other agencies and public officials, from time to time, issue reports and make public statements which, among other things, state that projected revenues and expenditures may be different from those forecast in the City’s financial plans. See ‘‘SECTION VII: FINANCIAL PLAN— Certain Reports.’’ The factors affecting the City’s financial condition described throughout this Official Statement are complex and are not intended to be summarized in this Introductory Statement. This Official Statement should be read in its entirety.

SECTION I: RECENT FINANCIAL DEVELOPMENTS

2005-2009 Financial Plan For the 2004 fiscal year, the City’s General Fund had an operating surplus of $1.928 billion, before discretionary transfers, and achieved balanced operating results in accordance with GAAP.The 2004 fiscal year is the twenty-fourth consecutive year that the City has achieved balanced operating results when reported in accordance with GAAP. The City’s expense and capital budgets for the 2005 fiscal year were adopted on June 25, 2004. The June Financial Plan, which was consistent with the City’s expense and capital budgets as adopted for the 2005 fiscal year, projected revenues and expenditures for the 2005 fiscal year balanced in accordance with GAAP, and projected gaps of $3.7 billion, $4.5 billion, and $3.7 billon for fiscal years 2006, 2007, and 2008, respectively. See ‘‘Section VI: FINANCIAL OPERATIONS—Forecast of 2004 Results.’’ On May 9, 2005, the City submitted to the Control Board the Financial Plan for the 2005 through 2009 fiscal years which was consistent with the Mayor’s Executive Budget released on May 5, 2005. The Financial Plan is a modification to the June Financial Plan, as subsequently modified by the financial plans submitted to the Control Board on October 21, 2004 and February 2, 2005 (the ‘‘February Financial Plan’’). The Financial Plan projects revenues and expenditures for the 2005 and 2006 fiscal years balanced in accordance with GAAP, and projects gaps of $4.5 billion, $4.2 billion, and $3.7 billion in fiscal years 2007 through 2009, respectively, after implementation of a gap-closing program described below. The Financial Plan reflects increases in projected net revenues since the June Financial Plan totaling $2.8 billion, $1.9 billion, $1.7 billion and $1.3 billion in fiscal years 2005 through 2008, respectively. Changes in projected revenues since the June Financial Plan include: (i) increases in projected net tax revenues of $2.9 billion, $1.6 billion, $1.6 billion and $1.2 billion in fiscal years 2005 through 2008,

2 respectively, resulting primarily from increases in personal income and business tax revenues, primarily due to securities industry profits and an improving economy, and increases in the mortgage recording, real property transfer and sales tax revenues; (ii) increases in non-tax revenues of $44 million, $100 million, $50 million and $44 million in fiscal years 2005 through 2008, respectively, reflecting primarily increased investment earnings; (iii) reduction in anticipated federal assistance of $50 million in fiscal year 2005; and (iv) the delay from fiscal year 2005 to fiscal year 2006 of the receipt from TSASC, Inc. (‘‘TSASC’’) of $120 million tobacco settlement receivables (‘‘TSRs’’) retained in the TSASC trapping account. For informa- tion on the TSASC trapping requirement, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—4. Miscellaneous Revenues.’’ The Financial Plan also reflects increases in projected net expenditures since the June Financial Plan totaling $10 million, $1.7 billion, $2.0 billion and $2.5 billion in fiscal years 2005 through 2008, respectively. Changes in projected expenditures since the June Financial Plan include: (i) increased Medicaid expenses of $184 million, $334 million, $508 million and $699 million in fiscal years 2005 through 2008, respectively; (ii) interest payments associated with the financing by the Hudson Yards Infrastructure Corporation (‘‘HYIC’’), a local development corporation created by the City, of the planned Hudson Yards development on the west side of Manhattan, of $6 million, $46 million, $95 million and $139 million in fiscal years 2005 through 2008, respectively; (iii) increased other debt service expenditures of $48 million and $86 million in fiscal years 2007 and 2008, respectively; (iv) increased pension and fringe benefit expenditures of $30 million, $742 million, $550 million and $457 million in fiscal years 2005 through 2008, respectively; (v) increased expenditures for education of $147 million in fiscal year 2005, $105 million in fiscal year 2006 and $110 million in each of fiscal years 2007 and 2008; (vi) increased agency spending of $232 million, $528 million, $373 million and $386 million in fiscal years 2005 through 2008, respectively; and (vii) increased expenses for the next round of collective bargaining of $100 million, $350 million and $625 million in fiscal years 2006 through 2008, respectively. Decreases in projected expenditures since the June Financial Plan include decreased debt service expenditures of $129 million and $113 million in fiscal years 2005 and 2006, respectively. Prior years’ expenses have been reduced by $200 million in fiscal year 2005 and the General Reserve has been reduced in fiscal year 2005 by $260 million. The Financial Plan also reflects a shortfall in anticipated State assistance of $201 million, $196 million, $94 million and $77 million in fiscal years 2005 through 2008, respectively. The Financial Plan also proposes a tax reduction program that will reduce tax revenues by $23 million, $235 million, $177 million and $17 million in fiscal years 2005 through 2008, respectively, primarily due to the proposed restoration of the local sales tax exemption on clothing and footwear purchases under $110 effective June 1, 2005, which requires State legislative approval. In addition, the Financial Plan sets forth gap-closing actions since the June Financial Plan to eliminate the previously projected gap for the 2006 fiscal year and to reduce projected gaps for fiscal years 2007 and 2008. The gap-closing actions include: (i) reduced agency expenditures or increased revenues totaling $413 million, $475 million, $318 million and $317 million in fiscal years 2005 through 2008, respectively; (ii) debt service savings of $10 million, $85 million, $1 million and $1 million in fiscal years 2005 through 2008, respectively; (iii) $85 million in fiscal year 2005 from the lease with the Port Authority of New York and New Jersey (the ‘‘Port Authority’’) for LaGuardia and John F. Kennedy International Airports and taxi medallion sales; and (iv) State actions of $23 million, $317 million, $375 million and $443 million in fiscal years 2005 through 2008, respectively, and additional federal actions of $50 million in fiscal year 2006, which require the approval of the federal government. The Financial Plan includes proposed discretionary transfers in fiscal year 2005 of $3.3 billion, reflecting prepayment of debt service and other payments due in fiscal year 2006. The Financial Plan makes provisions for wage increases for all City employees for the 2002-2005 round of bargaining consistent with the settlement with District Council 37 of the American Federation of State, County and Municipal Employees (‘‘DC 37’’). Any labor settlement in excess of the DC 37 pattern could result in substantial additional costs to the City. Each incremental 1% wage increase for the portion of the City’s workforce which does not yet have settled contracts for the 2002-2005 round of bargaining would cost approximately $160 million annually. Any incremental increases could be retroactive to as far back as the prior contracts’ expiration dates, the vast majority of which were before

3 July 1, 2003 and many of which were during the 2002 calendar year. The Financial Plan provides for 1.25% wage increases annually for all City employees for the next round of collective bargaining. For information regarding labor negotiations and recent labor settlements, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Expenditure Assumptions—1. Personal Services Costs.’’ The City Comptroller and others have issued reports identifying various risks. See ‘‘SECTION VII: FINANCIAL PLAN—Certain Reports.’’ It can be expected that the Financial Plan will engender public debate, which will continue through the time the budget is scheduled to be adopted in June 2005, and the City Council will seek to add agency expenditures in connection with the adoption of the City’s budget for fiscal year 2006. It is possible that projected savings and revenues will not be realized. The Financial Plan will be revised at the time the budget for fiscal year 2006 is adopted to reflect any changes in projected revenues or spending. In addition, the economic and financial condition of the City may be affected by various financial, social, economic, geo-political and other factors which could have a material effect on the City.

The State The State ended its 2004-2005 fiscal year in balance on a cash basis, with a reported closing balance in the General Fund of $1.2 billion. The Governor’s Executive Budget for the 2005-2006 fiscal year projected balance on a cash basis for the 2005-2006 fiscal year, with a closing balance in the General Fund of $1.8 million, and projected gaps of $2.6 billion in fiscal year 2006-2007 and $2.5 billion in fiscal year 2007-2008, assuming all the Executive Budget savings proposals were enacted. The State Legislature completed action on the budget for the 2005-2006 fiscal year on April 12, 2005 (the ‘‘Enacted Budget’’). The State released its Annual Information Statement on May 4, 2005 (the ‘‘Annual Information Statement’’). In the Annual Information Statement, the State Division of the Budget estimates that, in comparison to the Executive Budget, the Enacted Budget identified $1.4 billion in new General Fund resources to fund $1.4 billion in net additions, resulting in a balanced budget in fiscal year 2005-2006, a projected closing fund balance in the General Fund of $1.8 billion, and gaps of approximately $3.2 billion in fiscal year 2006-2007 and $4.1 billion in fiscal year 2007-2008. The Annual Information Statement identifies a number of risks inherent in implementation of the Enacted Budget. Such risks include required court actions or legislative approval affecting receipts and disbursements included in the Enacted Budget; costs that could materialize as a result of adverse rulings in pending litigation; federal disallowances or other federal actions that could produce adverse effects on the State’s projections of receipts and disbursements; and risks relating to the national and local economies, including large increases in energy prices, national security concerns and financial sector performance.

SECTION II: THE BONDS General The Bonds will be general obligations of the City issued pursuant to the Constitution and laws of the State and the City Charter and in accordance with bond resolutions of the Mayor and a certificate of the Deputy Comptroller for Public Finance (the ‘‘Certificate’’). The Bonds will mature and bear interest as described on the inside cover pages of this Official Statement. The Bonds will contain a pledge of the City’s faith and credit for the payment of the principal of, redemption premium, if any, and interest on the Bonds. Interest on the Bonds, calculated on a 30/360 day basis, will be payable to the registered owners thereof as shown on the registration books of the City on the Record Date (the fifteenth day of the calendar month immediately preceding the applicable interest payment date). All real property subject to taxation by the City will be subject to the levy of ad valorem taxes, without limitation as to rate or amount, to pay the principal of and interest on the Bonds.

Payment Mechanism Pursuant to the Financial Emergency Act, a general debt service fund (the ‘‘General Debt Service Fund’’ or the ‘‘Fund’’) has been established for City bonds and certain City notes. Pursuant to the Act,

4 payments of the City real estate tax must be deposited upon receipt in the Fund, and retained under a statutory formula, for the payment of debt service (with exceptions for debt service, such as principal of seasonal borrowings, that is set aside under other procedures). The statutory formula has in recent years resulted in retention of sufficient real estate taxes to comply with the City Covenants (as defined in ‘‘Certain Covenants and Agreements’’ below). If the statutory formula does not result in retention of sufficient real estate taxes to comply with the City Covenants, the City will comply with the City Covenants either by providing for early retention of real estate taxes or by making cash payments into the Fund. The principal of and interest on the Bonds will be paid from the Fund until the Act expires not earlier than July 1, 2008, and thereafter from a separate fund maintained in accordance with the City Covenants. Since its inception in 1978, the Fund has been fully funded at the beginning of each payment period. If the Control Board determines that retentions in the Fund are likely to be insufficient to provide for the debt service payable therefrom, it must require that additional real estate tax revenues be retained or other cash resources of the City be paid into the Fund. In addition, the Control Board is required to take such action as it determines to be necessary so that the money in the Fund is adequate to meet debt service requirements. Enforceability of City Obligations As required by the State Constitution and applicable law, the City pledges its faith and credit for the payment of the principal of and interest on all City indebtedness. Holders of City debt obligations have a contractual right to full payment of principal and interest at maturity. If the City fails to pay principal or interest, the holder has the right to sue and is entitled to the full amount due, including interest to maturity at the stated rate and at the rate authorized by law thereafter until payment. Under the General Municipal Law, if the City fails to pay any money judgment, it is the duty of the City to assess, levy and cause to be collected amounts sufficient to pay the judgment. Decisions indicate that judicial enforcement of statutes such as this provision in the General Municipal Law is within the discretion of a court. Other judicial decisions also indicate that a money judgment against a municipality may not be enforceable against municipal property devoted to public use. The rights of the owners of Bonds to receive interest, principal and redemption premium, if any, from the City could be adversely affected by a restructuring of the City’s debt under Chapter 9 of the Federal Bankruptcy Code. No assurance can be given that any priority of holders of City securities (including the Bonds) to payment from money retained in the Fund or from other sources would be recognized if a petition were filed by or on behalf of the City under the Federal Bankruptcy Code or pursuant to other subsequently enacted laws relating to creditors’ rights; such money might then be available for the payment of all City creditors generally. Judicial enforcement of the City’s obligation to make payments into the Fund, of the obligation to retain money in the Fund, of the rights of holders of bonds and notes of the City to money in the Fund, of the obligations of the City under the City Covenants and the State under the State Pledge and Agreement (in each case, as defined in ‘‘Certain Covenants and Agreements’’) may be within the discretion of a court. For further information concerning rights of owners of Bonds against the City, see ‘‘SECTION VIII: INDEBTEDNESS—Indebtedness of the City and Certain Other Entities.’’ Certain Covenants and Agreements The City will covenant that: (i) a separate fund or funds for the purpose of paying principal of and interest on bonds and interest on notes of the City (including required payments into, but not from, City sinking funds) shall be maintained by an officer or agency of the State or by a bank or trust company; and (ii) not later than the last day of each month, there shall be on deposit in a separate fund or funds an amount sufficient to pay principal of and interest on bonds and interest on notes of the City due and payable in the next succeeding month. The City currently uses the debt service payment mechanism described above to perform these covenants. The City will further covenant in the Bonds to provide a general reserve for each fiscal year to cover potential reductions in its projected revenues or increases in its projected expenditures during each such fiscal year, to comply with the financial reporting require- ments of the Act, as in effect from time to time and to limit its issuance of bond anticipation notes as required by the Act, as in effect from time to time.

5 The State pledges and agrees in the Financial Emergency Act that the State will not take any action that will impair the power of the City to comply with the covenants described in the preceding paragraph (the ‘‘City Covenants’’) or any right or remedy of any owner of the Bonds to enforce the City Covenants (the ‘‘State Pledge and Agreement’’). The City will covenant to make continuing disclosure with respect to the Bonds (the ‘‘Undertaking’’) as summarized below under ‘‘SECTION IX: OTHER INFORMATION— Continuing Disclosure Undertaking.’’ In the opinion of Bond Counsel, the enforceability of the City Covenants, the Undertaking and the State Pledge and Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted and may also be subject to the exercise of the State’s police powers and of judicial discretion in appropriate cases. The City Covenants, the Undertaking and the State Pledge and Agreement shall be of no force and effect with respect to any Bond if there is a deposit in trust with a bank or trust company of sufficient cash or cash equivalents to pay when due all principal of, applicable redemption premium, if any, and interest on such Bond.

Use of Proceeds

The proceeds of the Series O Tax-Exempt Bonds will be used for capital purposes and the proceeds of the Series O Taxable Bonds will be used for other discrete capital purposes, including, in each case, expenses of the City incurred in connection with the issuance and sale of the Bonds. The proceeds of the Series P and Q Bonds will be used to redeem, at or prior to maturity, the bonds identified in Appendix C hereto by providing for the principal of and interest and redemption premium, if any, on such bonds to the extent and to the payment dates shown and for the expenses of the City incurred in connection with the issuance and sale of the Series P and Q Bonds.

Optional Redemption

The Series O Bonds maturing after 2015 will be subject to redemption at the option of the City, on or after June 1, 2015, and the Series P and Q Bonds maturing after 2015 will be subject to redemption at the option of the City, on or after August 1, 2015, in whole or in part, by lot within each maturity and coupon, on any date, upon 30 days’ notice to Bondholders, at par, plus accrued interest to the date of redemption. The City may select amounts, coupons and maturities for redemption in its sole discretion. On and after any redemption date, interest will cease to accrue on the Bonds called for redemption.

Mandatory Redemption

The Series O Bonds maturing in 2027, 2030, 2033 and 2035 are Term Bonds subject to mandatory redemption, by lot within such maturity, on each date at a redemption price equal to the principal amount thereof, plus accrued interest, without premium, in the amounts set forth below:

Principal Amount to be Redeemed 2027 2030 2033 2035 June 1 Maturity Maturity Maturity Maturity 2026 $21,155,000 2027 21,110,000(1) 2028 $21,970,000 2029 23,065,000 2030 24,220,000(1) 2031 $25,430,000 2032 27,800,000 2033 8,150,000(1) 2034 $1,595,000 2035 1,595,000(1)

(1) Stated maturity.

6 The Series P Bonds maturing in 2028 are Term Bonds subject to mandatory redemption, by lot within such maturity, on each date at a redemption price equal to the principal amount thereof, plus accrued interest, without premium, in the amounts set forth below:

Principal Amount to be Redeemed 2028 August 1 Maturity 2026 $2,085,000 2027 1,510,000 2028 1,020,000(1)

(1) Stated maturity. At the option of the City, there shall be applied to or credited against any of the required amounts the principal amount of any such Term Bonds that have been defeased, purchased or redeemed and not previously so applied or credited. Defeased Term Bonds shall at the option of the City no longer be entitled, but may be subject, to the provisions thereof for mandatory redemption.

Bond Insurance The principal of and interest on the Series O Bonds maturing in 2016 (5% coupon, 3.76% yield), 2017, 2018 and 2019 (5% coupon, 3.94% yield) are expected to be insured by Financial Security Assurance Inc. (the ‘‘FSA Insured Bonds’’). Information about Financial Security Assurance Inc. (‘‘FSA’’) is set forth in Appendix D. A specimen FSA insurance policy is set forth in Appendix E. The principal of and interest on the Series O Bonds maturing in 2027 are expected to be insured by Ambac Assurance Corporation (the ‘‘Ambac Insured Bonds’’). Information about Ambac Assurance Corporation (‘‘Ambac Assurance’’) is set forth in Appendix D. A specimen Ambac Assurance policy is set forth in Appendix E. The principal of and interest on the Series P Bonds maturing in 2014, 2015, 2016 and 2018 and the Series Q Bonds maturing in 2014 through 2016 are expected to be insured by MBIA Insurance Corporation (the ‘‘MBIA Insured Bonds’’, and together with the FSA Insured Bonds and the Ambac Insured Bonds, the ‘‘Insured Bonds’’). Information about MBIA Insurance Corporation (‘‘MBIA’’) is set forth in Appendix D. A specimen MBIA insurance policy is set forth in Appendix E.

Bond Certificates

Book-Entry Only System The Depository Trust Company (‘‘DTC’’), New York, New York, will act as securities depository for the Bonds. Reference to the Bonds under the caption ‘‘Bond Certificates’’ shall mean all Bonds that are deposited with DTC from time to time. The Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC’s partnership nominee) and deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a ‘‘banking organization’’ within the meaning of the New York Banking Law, a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the New York Uniform Commercial Code, and a ‘‘clearing agency’’ registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its direct participants (‘‘Direct Participants’’) deposit with DTC. DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Partici- pants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (‘‘DTCC’’). DTCC in turn, is owned by a number of Direct Participants of DTC and members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, also subsidiaries of DTCC, as

7 well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (‘‘Indirect Participants’’). The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (under this caption, ‘‘Book-Entry Only System,’’ a ‘‘Beneficial Owner’’) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of Cede & Co. The deposit of Bonds with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Neither DTC nor Cede & Co. will consent or vote with respect to Bonds. Under its usual procedures, DTC mails an omnibus proxy (the ‘‘Omnibus Proxy’’) to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Payment of redemption proceeds and principal and interest on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or Fiscal Agent, The Bank of New York, on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in ‘‘street name,’’ and will be the responsibility of such Participant and not of DTC, Fiscal Agent, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or Fiscal Agent, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. The services of DTC as securities depository with respect to the Bonds may be discontinued at any time. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.

8 No assurance can be given by the City that DTC will make prompt transfer of payments to the Participants or that Participants will make prompt transfer of payments to Beneficial Owners. The City is not responsible or liable for payment by DTC or Participants or for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or Participants. For every transfer and exchange of the Bonds, the Beneficial Owners may be charged a sum sufficient to cover any tax, fee or other charge that may be imposed in relation thereto. Unless otherwise noted, certain of the information contained in this subsection ‘‘Book-Entry Only System’’ has been extracted from information furnished by DTC. Neither the City nor the underwriters of the Bonds make any representation as to the completeness or the accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof.

SECTION III: GOVERNMENT AND FINANCIAL CONTROLS

Structure of City Government The City of New York is divided into five counties, which correspond to its five boroughs. The City, however, is the only unit of local government within its territorial jurisdiction with authority to levy and collect taxes, and is the unit of local government primarily responsible for service delivery. Responsibility for governing the City is currently vested by the City Charter in the Mayor, the City Comptroller, the City Council, the Public Advocate and the Borough Presidents. — The Mayor. Michael R. Bloomberg, the Mayor of the City, took office on January 1, 2002. The Mayor is elected in a general election for a four-year term and is the chief executive officer of the City. The Mayor has the power to appoint the commissioners of the City’s various departments. The Mayor is responsible for preparing and administering the City’s annual Expense and Capital Budgets (as defined below) and financial plan. The Mayor has the power to veto local laws enacted by the City Council, but such a veto may be overridden by a two-thirds vote of the City Council. The Mayor has powers and responsibilities relating to land use and City contracts and all residual powers of the City government not otherwise delegated by law to some other public official or body. The Mayor is also a member of the Control Board. — The City Comptroller. William C. Thompson, Jr., the Comptroller of the City, took office on January 1, 2002. The City Comptroller is elected in a general election for a four-year term and is the chief fiscal officer of the City. The City Comptroller has extensive investigative and audit powers and responsibilities which include keeping the financial books and records of the City. The City Comptroller’s audit responsibilities include a program of performance audits of City agencies in connection with the City’s management, planning and control of operations. In addition, the City Comptroller is required to evaluate the Mayor’s budget, including the assumptions and methodology used in the budget. The Office of the City Comptroller is responsible under the City Charter and pursuant to State Law and City investment guidelines for managing and investing City funds for operating and capital purposes. The City Comptroller is also a member of the Control Board and is a trustee, the custodian and the delegated investment manager of the City’s five pension systems. The investments of those pension system assets, aggregating approximately $86.9 billion as of March 31, 2005, are made pursuant to the directions of the respective boards of trustees. — The City Council. The City Council is the legislative body of the City and consists of the Public Advocate and 51 members elected for four-year terms who represent various geographic districts of the City. Under the City Charter, the City Council must annually adopt a resolution fixing the amount of the real estate tax and adopt the City’s annual Expense Budget and Capital Budget (as defined below). The City Council does not, however, have the power to enact local laws imposing other taxes, unless such taxes have been authorized by State legislation. The City Council has powers and responsibilities relating to franchises and land use and as provided by State law. — The Public Advocate. Elizabeth F. Gotbaum, the Public Advocate, took office on January 1, 2002. The Public Advocate is elected in a general election for a four-year term. The Public

9 Advocate is first in the line of succession to the Mayor in the event of the disability of the Mayor or a vacancy in the office, pending an election to fill the vacancy. The Public Advocate appoints a member of the City Planning Commission and has various responsibilities relating to, among other things, monitoring the activities of City agencies, the investigation and resolution of certain complaints made by members of the public concerning City agencies and ensuring appropriate public access to government information and meetings. — The Borough Presidents. Each of the City’s five boroughs elects a Borough President who serves for a four-year term concurrent with other City elected officials. The Borough Presidents consult with the Mayor in the preparation of the City’s annual Expense Budget and Capital Budget. Five percent of discretionary increases proposed by the Mayor in the Expense Budget and, with certain exceptions, five percent of the appropriations supported by funds over which the City has substantial discretion proposed by the Mayor in the Capital Budget, must be based on appropriations proposed by the Borough Presidents. Each Borough President also appoints one member to the Panel for Educational Policy and has various responsibilities relating to, among other things, reviewing and making recommendations regarding applications for the use, development or improvement of land located within the borough, monitoring and making recommendations regarding the performance of contracts providing for the delivery of services in the borough and overseeing the coordination of a borough-wide public service complaint program. The City Charter provides that no person shall be eligible to be elected to or serve in the office of Mayor, Public Advocate, Comptroller, Borough President or Council member if that person has previously held such office for two or more full consecutive terms, unless one full term or more has elapsed since that person last held such office.

City Financial Management, Budgeting and Controls The Mayor is responsible under the City Charter for preparing the City’s annual expense and capital budgets (as adopted, the ‘‘Expense Budget’’ and the ‘‘Capital Budget,’’ respectively, and collectively, the ‘‘Budgets’’) and for submitting the Budgets to the City Council for its review and adoption. The Expense Budget covers the City’s annual operating expenditures for municipal services, while the Capital Budget covers expenditures for capital projects, as defined in the City Charter. Operations under the Expense Budget must reflect the aggregate expenditure limitations contained in financial plans. The City Council is responsible for adopting the Expense Budget and the Capital Budget. Pursuant to the City Charter, the City Council may increase, decrease, add or omit specific units of appropriation in the Budgets submitted by the Mayor and add, omit or change any terms or conditions related to such appropriations. The City Council is also responsible, pursuant to the City Charter, for approving modifications to the Expense Budget and adopting amendments to the Capital Budget beyond certain latitudes allowed to the Mayor under the City Charter. However, the Mayor has the power to veto any increase or addition to the Budgets or any change in any term or condition of the Budgets approved by the City Council, which veto is subject to an override by a two-thirds vote of the City Council, and the Mayor has the power to implement expenditure reductions subsequent to adoption of the Expense Budget in order to maintain a balanced budget. In addition, the Mayor has the power to determine the non-property tax revenue forecast on which the City Council must rely in setting the property tax rates for adopting a balanced City budget.

Office of Management and Budget The City’s Office of Management and Budget (‘‘OMB’’), with a staff of approximately 300, is the Mayor’s primary advisory group on fiscal issues and is also responsible for the preparation, monitoring and control of the City’s Budgets and four-year financial plans. In addition, OMB is responsible for the preparation of a Ten-Year Capital Strategy. State law requires the City to maintain its Expense Budget balanced when reported in accordance with GAAP. In addition, the City Charter requires that the City Council set tax rates on real property at a level sufficient to produce a balanced budget in accordance with GAAP. In addition to the City’s annual

10 Expense and Capital Budgets, the City prepares a four-year financial plan which encompasses the City’s revenue, expenditure, cash flow and capital projections. All Covered Organizations, as hereinafter defined, are also required to maintain budgets that are balanced when reported in accordance with GAAP. From time to time certain Covered Organizations have had budgets providing for operations on a cash basis but not balanced under GAAP. To assist in achieving the goals of the financial plan and budget, the City reviews its financial plan periodically and, if necessary, prepares modifications to incorporate actual results and revisions to projections and assumptions to reflect current information. The City’s revenue projections are continually reviewed and periodically updated with the benefit of discussions with a panel of private economists analyzing the effects of changes in economic indicators on City revenues and information from various economic forecasting services. Office of the Comptroller The City Comptroller is the City’s chief fiscal officer and is responsible under the City Charter for reviewing and commenting on the City’s Budgets and financial plans, including the assumptions and methodologies used in their preparation. The City Comptroller, as an independently elected public official, is required to report annually to the City Council on the state of the City’s economy and finances and periodically to the Mayor and the City Council on the financial condition of the City and to make recommendations, comments and criticisms on the operations, fiscal policies and financial transactions of the City. Such reports, among other things, have differed with certain of the economic, revenue and expenditure assumptions and projections in the City’s financial plans and Budgets. See ‘‘SECTION VII: FINANCIAL PLAN—Certain Reports.’’ The Office of the City Comptroller establishes the City’s accounting and financial reporting practices and internal control procedures. The City Comptroller is also responsible for the preparation of the City’s annual financial statements, which, since 1978, have been required to be reported in accordance with GAAP. The Comprehensive Annual Financial Report (the ‘‘CAFR’’) of the Comptroller for the 2003 fiscal year, which includes, among other things, the City’s financial statements for the 2003 fiscal year, has received the Government Finance Officers Association award of the Certificate of Achievement for Excellence in Financial Reporting, the twenty-third consecutive year the CAFR of the Comptroller has won such award. The CAFR for the 2004 fiscal year was released on October 29, 2004. All contracts for goods and services requiring the expenditure of City moneys must be registered with the City Comptroller. No contract can be registered unless funds for its payment have been appropriated by the City Council or otherwise authorized. The City Comptroller also prepares vouchers for payments for such goods and services and cannot prepare a voucher unless funds are available in the Budgets for its payment. The City Comptroller is also required by the City Charter to audit all City agencies and has the power to audit all City contracts. The Office of the Comptroller conducts both financial and management audits and has the power to investigate corruption in connection with City contracts or contractors. The Mayor and City Comptroller are responsible for the issuance of City indebtedness. The City Comptroller oversees the payment of such indebtedness and is responsible for the custody of certain sinking funds. Financial Reporting and Control Systems Since 1978, the City’s financial statements have been required to be audited by independent certified public accountants and to be presented in accordance with GAAP. The City has completed twenty-four consecutive fiscal years with a General Fund surplus when reported in accordance with then applicable GAAP. In June 1999, Governmental Accounting Standards Board (‘‘GASB’’) issued Statement No. 34, ‘‘Basic Financial Statements and Management’s Discussion and Analysis for State and Local Govern- ments’’ (‘‘GASB 34’’). The City implemented the new standards beginning in its financial statements for

11 the fiscal year ended June 30, 2001. GASB 34 requires, among other things, the presentation of ‘‘government-wide’’ financial statements that use the accrual method of accounting and are prepared on a different measurement focus than the City’s fund financial statements, including the City’s General Fund. The General Fund uses the modified accrual basis of accounting and the current financial resources measurement focus. A summary reconciliation of the differences between ‘‘government-wide’’ and fund financial statements is presented in the City’s financial statements. See ‘‘APPENDIX B—FINANCIAL STATEMENTS.’’ As more fully described in the section entitled ‘‘Management’s Discussion and Analysis,’’ the application of the accrual basis of accounting in the ‘‘government-wide’’ statements results in an excess of liabilities over assets and a decline in net assets in each of the fiscal years 2002 and 2003 and an excess of assets over liabilities and an increase in net assets in fiscal year 2004. Both OMB and the Office of the Comptroller utilize a financial management system which provides comprehensive current and historical information regarding the City’s financial condition. This informa- tion, which is independently evaluated by each office, provides a basis for City action required to maintain a balanced budget and continued financial stability. The City’s operating results and forecasts are analyzed, reviewed and reported on by each of OMB and the Office of the Comptroller as part of the City’s overall system of internal control. Internal control systems are reviewed regularly, and the City Comptroller requires an annual report on internal control and accountability from each agency. Comprehensive service level and productivity targets are formulated and monitored for each agency by the Mayor’s Office of Operations and reported publicly in a semiannual management report. The City has developed and utilizes a cash forecasting system which forecasts its daily cash balances. This enables the City to predict more accurately its short-term borrowing needs and maximize its return on the investment of available cash balances. Monthly statements of operating revenues and expenditures, capital revenues and expenditures and cash flow are reported after each month’s end, and major variances from the financial plan are identified and explained. City funds held for operation and capital purposes are managed by the Office of the City Comptroller, with specific guidelines as to investment vehicles. The City does not invest such funds in leveraged products or use reverse repurchase agreements. The City invests primarily in obligations of the United States Government, its agencies and instrumentalities, high grade commercial paper and repurchase agreements with primary dealers. The repurchase agreements are collateralized by United States Government treasuries, agencies and instrumentalities, held by the City’s custodian bank and marked to market daily. More than 95% of the aggregate assets of the City’s five defined benefit pension systems are managed by outside managers, supervised by the Office of the City Comptroller, and the remainder is held in cash or managed by the City Comptroller. Allocations of investment assets are determined by each fund’s board of trustees. As of March 31, 2005 aggregate pension assets were allocated approximately as follows: 50% U.S. equities; 27% U.S. fixed income; 19% international equities; 3% private equity and real estate; and 1% cash. Financial Emergency Act The Financial Emergency Act requires that the City submit to the Control Board, at least 50 days prior to the beginning of each fiscal year (or on such other date as the Control Board may approve), a financial plan for the City and certain State governmental agencies, public authorities or public benefit corporations (‘‘PBCs’’) which receive or may receive monies from the City directly, indirectly or contingently (the ‘‘Covered Organizations’’) covering the four-year period beginning with such fiscal year. The New York City Transit Authority and the Manhattan and Bronx Surface Transit Operating Authority (collectively, ‘‘New York City Transit’’ or ‘‘NYCT’’ or ‘‘Transit Authority’’), the New York City Health and Hospitals Corporation (‘‘HHC’’) and the New York City Housing Authority (the ‘‘Housing Authority’’ or ‘‘HA’’) are examples of Covered Organizations. The Act requires that the City’s four-year financial plans conform to a number of standards. Unless otherwise permitted by the Control Board under certain conditions, the City must prepare and balance its budget covering all expenditures other than capital items so that the results of such budget will not show a deficit when reported in accordance with

12 GAAP. Provision must be made, among other things, for the payment in full of the debt service on all City securities. The budget and operations of the City and the Covered Organizations must be in conformance with the financial plan then in effect.

From 1975 to June 30, 1986, the City was subject to a Control Period, as defined in the Act, which was terminated upon the satisfaction of the statutory conditions for termination, including the termination of all federal guarantees of obligations of the City, a determination by the Control Board that the City had maintained a balanced budget in accordance with GAAP for each of the three immediately preceding fiscal years and a certification by the State and City Comptrollers that sales of securities by or for the benefit of the City satisfied its capital and seasonal financing requirements in the public credit markets and were expected to satisfy such requirements in the 1987 fiscal year. With the termination of the Control Period, certain Control Board powers were suspended including, among others, its power to approve or disapprove certain contracts (including collective bargaining agreements), long-term and short-term borrowings, and the four-year financial plan and modifications thereto of the City and the Covered Organizations. After the termination of the Control Period but prior to the statutory expiration date of the Act not earlier than July 1, 2008, the City is still required to develop a four-year financial plan each year and to modify the plan as changing circumstances require. Prior to July 1, 2008, the Control Board must reimpose a Control Period upon the occurrence or substantial likelihood and imminence of the occurrence of any one of certain events specified in the Act. These events are (i) failure by the City to pay principal of or interest on any of its notes or bonds when due or payable, (ii) the existence of a City operating deficit of more than $100 million, (iii) issuance by the City of notes in violation of certain restrictions on short-term borrowing imposed by the Act, (iv) any violation by the City of any provision of the Act which substantially impairs the ability of the City to pay principal of or interest on its bonds or notes when due and payable or its ability to adopt or adhere to an operating budget balanced in accordance with the Act, or (v) joint certification by the State and City Comptrollers that they could not at that time make a joint certification that sales of securities in the public credit market by or for the benefit of the City during the immediately preceding fiscal year and the current fiscal year satisfied its capital and seasonal financing requirements during such period and that there is a substantial likelihood that such securities can be sold in the general public market from the date of the joint certification through the end of the next succeeding fiscal year in amounts that will satisfy substantially all of the capital and seasonal financing requirements of the City during such period in accordance with the financial plan then in effect.

Financial Review and Oversight The Control Board, with the Office of the State Deputy Comptroller (‘‘OSDC’’), reviews and monitors revenues and expenditures of the City and the Covered Organizations. In addition, the Independent Budget Office (the ‘‘IBO’’) has been established pursuant to the City Charter to provide analysis to elected officials and the public on relevant fiscal and budgetary issues affecting the City.

The Control Board is required to: (i) review the four-year financial plan of the City and of the Covered Organizations and modifications thereto; (ii) review the operations of the City and the Covered Organizations, including their compliance with the financial plan; and (iii) review certain contracts, including collective bargaining agreements, of the City and the Covered Organizations. The requirement to submit four-year financial plans and budgets for review was in response to the severe financial difficulties and loss of access to the credit markets encountered by the City in 1975. The Control Board must reexamine the financial plan on at least a quarterly basis to determine its conformance to statutory standards.

The ex officio members of the Control Board are the Governor of the State of New York (Chairman); the Comptroller of the State of New York; the Mayor of The City of New York; and the Comptroller of The City of New York. In addition, there are three private members appointed by the Governor. The Executive Director of the Control Board is appointed jointly by the Governor and the Mayor. The Control Board is assisted in the exercise of its responsibilities and powers under the Financial Emergency Act by the State Deputy Comptroller.

13 SECTION IV: SOURCES OF CITY REVENUES The City derives its revenues from a variety of local taxes, user charges and miscellaneous revenues, as well as from federal and State unrestricted and categorical grants. State aid as a percentage of the City’s revenues has remained relatively constant over the period from 1980 to 2004, while unrestricted federal aid has been sharply reduced. The City projects that local revenues will provide approximately 68.8% of total revenues in the 2005 fiscal year while federal aid, including categorical grants, will provide 13.1%, and State aid, including unrestricted aid and categorical grants, will provide 18.1%. Adjusting the data for comparability, local revenues provided approximately 60.6% of total revenues in 1980, while federal and State aid each provided approximately 19.7%. A discussion of the City’s principal revenue sources follows. For additional information regarding assumptions on which the City’s revenue projections are based, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions.’’ For information regarding the City’s tax base, see ‘‘APPENDIX A—ECONOMIC AND DEMOGRAPHIC INFORMATION.’’

Real Estate Tax The real estate tax, the single largest source of the City’s revenues, is the primary source of funds for the City’s General Debt Service Fund. The City expects to derive approximately 38.1% of its total tax revenues and 21.8% of its total revenues for the 2005 fiscal year from the real estate tax. For information concerning tax revenues and total revenues of the City for prior fiscal years, see ‘‘SECTION VI: FINANCIAL OPERATIONS—2000-2004 Summary of Operations.’’ The State Constitution authorizes the City to levy a real estate tax without limit as to rate or amount (the ‘‘debt service levy’’) to cover scheduled payments of the principal of and interest on indebtedness of the City. However, the State Constitution limits the amount of revenue which the City can raise from the real estate tax for operating purposes (the ‘‘operating limit’’) to 2.5% of the average full value of taxable real estate in the City for the current and the last four fiscal years less interest on temporary debt and the aggregate amount of business improvement district charges subject to the 2.5% tax limitation. The table below sets forth the percentage of the debt service levy to the total levy. The City Council has adopted a distinct tax rate for each of the four categories of real property established by State legislation.

COMPARISON OF REAL ESTATE TAX LEVIES,TAX LIMITS AND TAX RATES Levy Within Debt Operating Levy Service Limitasa Within Debt Levy as a Percentage of Rate Per Average Tax Rate Operating Service Percentage of Operating Operating $100 of Full Per $100 of Fiscal Year Total Levy(1) Limit Levy(2) Total Levy Limit Limit Valuation(3) Assessed Valuation(4) (Dollars in Millions, except for Tax Rates) 2000...... $8,374.3 $7,223.2 $1,138.9 13.6% $ 7,268.7 99.4% $2.62 $10.37 2001...... 8,730.3 7,432.7 1,274.6 14.6 7,573.1 98.1 2.59 10.37 2002...... 9,271.2 8,085.9 1,148.9 12.4 8,128.0 99.5 2.46 10.37 2003...... 10,688.8 8,694.6 1,982.3 18.5 8,925.2 97.4 2.52 12.28 2004...... 12,250.7 9,387.4 2,821.2 23.0 9,893.5 94.9 2.50 12.28 2005...... 12,720.0 9,615.0 2,485.6 19.5 10,675.8 90.1 2.46 12.28

(1) As approved by the City Council. (2) The debt service levy includes a portion of the total reserve for uncollected real estate taxes. (3) Full valuation is based on the special equalization ratios (discussed below) and the billable assessed valuation. Special equalization ratios and full valuations are revised periodically as a result of surveys by the State Board of Real Property Services (as defined below). (4) The increase in the rate between fiscal year 2002 and fiscal year 2003 reflects the 18.49% real estate tax increase effective January 1, 2003 which resulted in approximately $837 million, $1.7 billion and $1.8 billion in increased collections in the 2003 through 2005 fiscal years, respectively. Assessment The City has traditionally assessed real property at less than market value. The State Board of Real Property Services (the ‘‘State Board’’) is required by law to determine annually the relationship between taxable assessed value and market value which is expressed as the ‘‘special equalization ratio.’’ The special equalization ratio is used to compute full value for the purpose of measuring the City’s compliance with

14 the operating limit and general debt limit. For a discussion of the City’s debt limit, see ‘‘SECTION VIII: INDEBTEDNESS—Indebtedness of the City and Certain Other Entities—Limitations on the City’s Authority to Contract Indebtedness.’’ The ratios are calculated by using the most recent market value surveys available and a projection of market value based on recent survey trends, in accordance with methodologies established by the State Board from time to time. Ratios, and therefore full values, may be revised when new surveys are completed. The ratios and full values used to compute the 2005 fiscal year operating limit and general debt limit which are shown in the table below, have been established by the State Board and include the results of the calendar year 2003 market value survey. For information concerning litigation asserting that the special equalization ratios calculated by the State Board in certain years violate State law because they substantially overestimate the full value of City real estate for the purposes of calculating the operating limit, and that the City’s real estate tax levy for operating purposes exceeded the State Constitutional limit, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’

BILLABLE ASSESSED AND FULL VALUE OF TAXABLE REAL ESTATE(1) Billable Assessed Valuation of Special Taxable Equalization Fiscal Year Real Estate(2) ÷ Ratio = Full Valuation(2) 2001...... $ 84,319,741,571 0.2340 $360,340,775,944 2002...... 89,539,563,218 0.2283 392,201,328,156 2003...... 94,506,250,871 0.2230 423,794,846,955 2004...... 99,854,097,559 0.2161 462,073,565,752 2005...... 103,676,971,611 0.2004 517,350,157,740 Average: $431,152,134,909

(1) Also assessed by the City, but excluded from the computation of taxable real estate, are various categories of property exempt from taxation under State law. For the 2004 fiscal year, the billable assessed value of all real estate (taxable and exempt) was $174.7 billion comprised of $67.8 billion of fully exempt real estate, $33.3 billion of partially taxable real estate and $73.7 billion of fully taxable real estate. (2) Figures are based on estimates of the special equalization ratio which are revised annually. These figures are derived from official City Council Tax Resolutions adopted with respect to the 2005 fiscal year. These figures differ from the assessed and full valuation of taxable real estate reported in the CAFR of the City Comptroller, which excludes veterans’ property subject to tax for school purposes and is based on estimates of the special equalization ratio which are not revised annually. State law provides for the classification of all real property in the City into one of four statutory classes. Class one primarily includes one-, two- and three-family homes; class two includes certain other residential property not included in class one; class three includes most utility real property; and class four includes all other real property. The total tax levy consists of four tax levies, one for each class. Once the tax levy is set for each class, the tax rate for each class is then fixed annually by the City Council by dividing the levy for such class by the billable assessed value for such class. Assessment procedures differ for each class of property. For fiscal year 2005, class one was assessed at approximately 8% of market value and classes two, three and four were each assessed at 45% of market value. In addition, individual assessments on class one parcels cannot increase by more than 6% per year or 20% over a five-year period. Market value increases and decreases for most of class two and all of class four are phased in over a period of five years. Increases in class one market value in excess of applicable limitations are not phased in over subsequent years. There is also no phase in for class three property. Class two and class four real property have three assessed values: actual, transition and billable. Actual assessed value is established for all tax classes without regard to the five-year phase-in requirement applicable to most class two and all class four properties. The transition assessed value reflects this phase-in. Billable assessed value is the basis for tax liability and is the lower of the actual or transition assessment. The share of the total levy that can be borne by each class is regulated by the provisions of the Real Property Tax Law. Each class share of the total tax levy is updated annually to reflect new construction, demolition, alterations or changes in taxable status and is subject to limited adjustment to reflect market value changes among the four classes. Class share adjustments are limited to a 5% maximum increase per

15 year. Maximum class increases below 5% must be, and typically are, approved by the State legislature. Fiscal year 2005 tax rates were set on June 24, 2004, and reflect a 5% limitation on the market value adjustment for 2005 and an average tax rate held at $12.283 per $100 of assessed value, though individual class tax rates were changed from the prior year level. City real estate tax revenues may be reduced in future fiscal years as a result of tax refund claims asserting overvaluation, inequality of assessment and illegality. For a discussion of various proceedings challenging assessments of real property for real estate tax purposes, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’ For further information regarding the City’s potential exposure in certain of these proceedings, see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note D.5.’’ The State Board annually certifies various class ratios and class equalization rates relating to the four classes of real property in the City. ‘‘Class ratios,’’ which are determined for each class by the State Board by calculating the ratio of assessed value to market value, are used in real estate tax certiorari proceedings involving allegations of inequality of assessments. For further information regarding the City’s proceed- ings, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’ Trend in Taxable Assessed Value During the decade prior to fiscal year 1993, real estate tax revenues grew substantially. Because State law provides for increases in assessed values of most properties to be phased into property tax bills over five-year periods, billable assessed values continued to grow and real estate tax revenue increased through fiscal year 1993 even as market values declined during the local recession. From fiscal year 1994 through fiscal year 1997 billable assessed values declined, reflecting the impact of the protracted local recession on office vacancy rates and on office building valuations. Billable assessed value resumed slow growth in fiscal years 1998 and 1999, growing 0.7% and 2.6%, respectively, as the local recovery began to accelerate and office vacancy rates dropped below twelve percent. For fiscal year 2000, billable assessed valuation rose by $2.4 billion to $80.1 billion. The billable assessed valuation as determined by the Department of Finance and as reported in the CAFR of the City Comptroller rose to $83.3 billion, $88.3 billion, $93.3 billion and $98.6 billion for fiscal years 2001 through 2004 respectively. The billable assessed valuation for the 2005 fiscal year as determined by the Department of Finance is $102.4 billion. The Department of Finance released the tentative assessment roll for fiscal year 2006 on January 14, 2005. The billable assessed value rose by $7.8 billion to $110.2 billion over the 2005 final assessment roll. However, the final roll to be released in May 2005 is expected to be approximately $1.2 billion lower than the tentative roll level. Billable assessed valuations are forecast to grow by 6.0% in fiscal year 2007 and 5.2% and 4.5% in fiscal years 2008 and 2009, respectively. Collection of the Real Estate Tax Real estate tax payments are due each July 1 and January 1. Owners of class one and class two properties assessed at $80,000 or less and cooperatives whose individual units on average are valued at $80,000 or less are eligible to make tax payments in quarterly installments on July 1, October 1, January 1 and April 1. An annual interest rate of 9% compounded daily is imposed upon late payments on properties for which the annual tax bill does not exceed $2,750 except in the case of (i) any parcel with respect to which the real estate taxes are held in escrow and paid by a mortgage escrow agent and (ii) parcels consisting of vacant or unimproved land. An interest rate of 18% compounded daily is imposed upon late payments on all other properties. These interest rates are set annually. The City primarily uses two methods to enforce the collection of real estate taxes. The City is authorized to sell real estate tax liens on class one properties which are delinquent for at least three years and class two, three and four properties which are delinquent for at least one year. In addition, the City is entitled to foreclose delinquent tax liens by in rem proceedings after one year of delinquency with respect to properties other than one- and two-family dwellings and condominium apartments for which the annual tax bills do not exceed $2,750, as to which a three-year delinquency rule is in effect. The real estate tax is accounted for on a modified accrual basis in the General Fund. Revenue accrued is limited to prior year payments received, offset by refunds made, within the first two months of

16 the following fiscal year. In deriving the real estate tax revenue forecast, a reserve is provided for cancellations or abatements of taxes and for nonpayment of current year taxes owed and outstanding as of the end of the fiscal year. The following table sets forth the amount of delinquent real estate taxes (owed and outstanding as of the end of the fiscal year of levy) for each of the fiscal years indicated. Delinquent real estate taxes do not include real estate taxes subject to cancellation or abatement under various exemption or abatement programs. Delinquent real estate taxes generally increase during a recession and when the real estate market deteriorates. Delinquent real estate taxes generally decrease as the City’s economy and real estate market recover. In fiscal years 2000, 2001, 2002, 2003, 2004 and 2005, the City sold to separate business trusts real estate tax liens for which the City received net proceeds of approximately $73 million, $211 million, $44.5 million, $22.6 million, $89.8 million and $42.3 million, respectively.

REAL ESTATE TAX COLLECTIONS AND DELINQUENCIES

Cancellations, Tax Net Credits, Delinquency Collections Prior Year Abatements, Delinquent as a Tax Collections as a (Delinquent Exempt Property as of End Percentage Tax on Current Percentage Tax) Restored and of Fiscal of Tax Fiscal Year Levy(1) Year Levy(2) of Tax Levy Collections Refunds(3) Shelter Rent Year(4) Levy Lien Sale(5) (Dollars In Millions) 2000 ..... $8,374.3 $ 7,768.1 92.8% $149.2 $(200.2) $(345.7) $(260.5) 3.11% $ 73.0 2001 ..... 8,730.3 8,069.1 92.4 132.3 (256.2) (410.5) (250.7) 2.87 210.9 2002 ..... 9,271.2 8,590.8 92.6 151.2 (138.1) (374.2) (306.2) 3.30 44.5 2003 ..... 10,688.8 9,943.5 93.0 126.3 (149.1) (457.2) (288.1) 2.70 22.6 2004 ..... 12,250.7 11,370.3 92.8 180.1 (195.1) (591.0) (289.3) 2.36 89.8 2005(6) . . . 12,720.0 11,534.1 90.7 152.0 (227.0) (853.7) (332.2) 2.61 42.3

(1) As approved by the City Council through fiscal year 2005. (2) Quarterly collections on current year levy. (3) Includes repurchases of defective tax liens amounting to $10.8 million, $15.1 million, $3.9 million, $11.1 million, $5.6 million, and $3 million in the 2000, 2001, 2002, 2003, 2004, and 2005 fiscal years, respectively. (4) These figures include taxes due on certain publicly owned property and exclude delinquency on shelter rent and exempt property. (5) Net of reserve for defective liens. (6) Forecast.

Other Taxes The City expects to derive 61.9% of its total tax revenues for the 2005 fiscal year from a variety of taxes other than the real estate tax, such as: (i) the 41⁄8% sales and compensating use tax, in addition to the 41⁄2% sales and use tax imposed by the State upon receipts from retail sales of tangible personal property and certain services in the City; (ii) the personal income tax on City residents; (iii) a general corporation tax levied on the income of corporations doing business in the City; and (iv) a banking corporation tax imposed on the income of banking corporations doing business in the City. For local taxes other than the real estate tax, the City may adopt and amend local laws for the levy of local taxes to the extent authorized by the State. This authority can be withdrawn, amended or expanded by State legislation. Without State authorization, the City may impose real estate taxes to fund general operations in an amount not to exceed 2.5% of property values in the City as determined under a State mandated formula. In addition, the State cannot restrict the City’s authority to levy and collect real estate taxes in excess of the 2.5% limitation in the amount necessary to pay principal of and interest on City indebtedness. For further information concerning the City’s authority to impose real estate taxes, see ‘‘Real Estate Tax’’ above. Payments by the State to the City of sales tax and stock transfer tax revenues are subject to appropriation by the State and are made available first to the Municipal Assistance Corporation For The City of New York (‘‘MAC’’) for payment of MAC debt service, reserve fund requirements and operating expenses with the balance payable to the City. On November 4, 2004, all of MAC’s outstanding bonds were defeased with the proceeds of Sales Tax Asset Receivable Corporation (‘‘STAR Corp.’’) bonds and MAC funds. A portion of sales tax payments payable to the City would be

17 paid to the New York City Transitional Finance Authority (‘‘TFA’’) if personal income tax revenues do not satisfy specified debt service ratios. MAC operating expenses and State oversight costs are expected to total $8 million in fiscal year 2005.

Revenues from taxes other than the real estate tax in the 2004 fiscal year increased by $3.265 billion, an increase of approximately 24.6% from the 2003 fiscal year. The following table sets forth, by category, revenues from taxes, other than the real estate tax, for each of the City’s 2000 through 2004 fiscal years. 2000 2001 2002 2003 2004 (In Millions) Personal Income(1) ...... $ 5,353 $ 5,746 $ 4,538 $ 4,460 $ 5,984 General Corporation ...... 1,779 1,735 1,330 1,237 1,540 Banking Corporation ...... 347 424 320 213 415 Unincorporated Business Income ...... 805 820 791 832 908 Sales ...... 3,509 3,662 3,360 3,535 4,018 Commercial Rent(2) ...... 344 377 380 397 426 Real Property Transfer ...... 483 473 425 513 766 Mortgage Recording ...... 403 407 477 526 817 Utility ...... 247 300 258 295 291 Cigarette ...... 31 28 27 159 138 Hotel ...... 219 241 184 192 217 All Other(3) ...... 473 351 381 367 487 Audits ...... 416 401 485 571 576 Total ...... $14,409 $14,965 $12,957 $13,297 $16,583

Note: Totals may not add due to rounding. (1) Personal Income excludes $247 million, $407 million, $451 million, $537 million and $109 million retained by the TFA in fiscal years 2000, 2001, 2002, 2003 and 2004, respectively. In fiscal years 2000, 2001, 2002, 2003 and 2004, Personal Income includes $200 million, $415 million, $520 million, $540 million and $540 million, respectively, which was provided to the City by the State as a reimbursement for the reduced personal income tax revenues resulting from the School Tax Relief Program (‘‘STAR Program’’). Personal Income taxes flow directly from the State to the TFA, and from the TFA to the City only to the extent not required by the TFA for debt service, reserves, operating expenses and contractual and other obligations incurred pursuant to the TFA indenture. Personal Income also reflects the impact of a grant of $624 million to the TFA in fiscal year 2003 which was used by the TFA to pay debt service in fiscal year 2004, thereby increasing tax revenue in fiscal year 2004 by $624 million. (2) Commercial Rent reflects legislation providing for various credit and exemptions which reduced collections. (3) All Other includes, among others, the stock transfer tax through fiscal year 2000, OTB net revenues, beer and liquor taxes, and the automobile use tax, but excludes the State’s STAR Program aid of $260 million, $504 million, $632 million, $660 million and $677 million in fiscal years 2000, 2001, 2002, 2003 and 2004, respectively, and for fiscal year 2001 only excludes prior year real property penalty and interest of $37 million which is included in Interest Income under ‘‘Miscellaneous Revenues’’ below.

Miscellaneous Revenues

Miscellaneous revenues include revenue sources such as charges collected by the City for the issuance of licenses, permits and franchises, interest earned by the City on the investment of City cash balances, tuition and fees at the Community Colleges, reimbursement to the City from the proceeds of water and sewer rates charged by the New York City Water Board (the ‘‘Water Board’’) for costs of delivery of water and sewer services and paid to the City by the Water Board for its lease interest in the water and sewer system, rents collected from tenants in City-owned property and from the Port Authority with respect to airports, and the collection of fines. The following table sets forth amounts of miscellaneous revenues for each of the City’s 2000 through 2004 fiscal years.

18 2000 2001 2002 2003 2004 (In Millions) Licenses, Permits and Franchises ...... $ 329 $ 338 $ 356 $ 357 $ 374 Interest Income ...... 195 245 81 43 30 Charges for Services ...... 439 439 461 501 592 Water and Sewer Payments ...... 801 843 858 846 885 Rental Income ...... 139 154 115 109 108 Fines and Forfeitures ...... 468 495 485 548 697 Other ...... 718 1,109 1,383 2,244 684 Total...... $3,089 $3,623 $3,739 $4,648 $3,370

Note: Totals may not add due to rounding.

Fees and charges collected from the users of the water and sewer system of the City are revenues of the Water Board, a public benefit corporation all of the members of which are appointed by the Mayor. The Water Board currently holds a long-term leasehold interest in the water and sewer system pursuant to a lease between the Water Board and the City.

Other miscellaneous revenues for fiscal year 2000 include $42 million from the recovery of prior year FICA overpayments. Other miscellaneous revenues for fiscal years 2000, 2001, 2002, 2003 and 2004 include $247 million, $154 million, $211 million, $150 million and $67 million, respectively, of TSRs from the settlement of litigation with certain cigarette manufacturers, that are not retained by TSASC for debt service, trapping requirements and operating expenses. Other miscellaneous revenues for fiscal years 2001, 2002, 2003 and 2004 do not include TSRs retained by TSASC for debt service, trapping requirements and operating expenses, totaling $50 million, $45 million, $103 million and $147 million, respectively. For further information see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—4. Miscellaneous Revenues.’’ Other miscellaneous revenues for fiscal year 2001 include the receipt of $340 million from the sale of the Coliseum, $25 million from asset sales and $85 million from the health benefit stabilization fund. Other miscellaneous revenues for fiscal year 2002 include $208 million from the sale of mortgages of the Department of Housing Preservation and Development (‘‘HPD’’), $154 million reimbursement by HHC for malpractice claims and $361 million in TFA reimbursement for costs related to or arising from the September 11 attack (‘‘Recovery Costs’’). Other miscellaneous revenues for fiscal year 2003 include $50 million in recovery of prior expenditures, $106 million in reimbursement for landfill closure costs and $1.5 billion of TFA bond proceeds to reimburse Recovery Costs. Other miscellaneous revenues for fiscal year 2004 include $95 million from the sale of 300 taxi medallions and $71 million from a financing by the New York City Industrial Development Agency which reimbursed the City for costs incurred in connection with the New York Stock Exchange project. For information on TFA borrowing for Recovery Costs, see ‘‘SECTION VIII: INDEBTEDNESS— Indebtedness of the City and Certain Other Entities.’’

Unrestricted Intergovernmental Aid

Unrestricted federal and State aid has consisted primarily of per capita aid from the State government. These funds, which are not subject to any substantial restriction as to their use, are used by the City as general support for its Expense Budget. State general revenue sharing (State per capita aid) is allocated among the units of local government by statutory formulas which take into account the distribution of the State’s population and the full valuation of taxable real property. In recent years, however, such allocation has been based on prior year levels in lieu of the statutory formula. For a further discussion of unrestricted State aid, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—5. Unrestricted Intergovernmental Aid.’’

The following table sets forth amounts of unrestricted federal and State aid received by the City in each of its 2000 through 2004 fiscal years.

19 2000 2001 2002 2003 2004 (In Millions) State Per Capita Aid...... $405 $327 $328 $ 400 $327 Other(1) ...... 226 307 338 1,043 636 Total...... $631 $634 $666 $1,443 $963

(1) Included in the 2000, 2001, 2002, 2003 and 2004 fiscal years are $147 million, $158 million, $201 million, $180 million and $271 million, respectively, of aid associated with the partial State takeover of long-term care Medicaid costs. Included in the 2003 and 2004 fiscal years are approximately $762 million and $151 million, respectively, in non-recurring Federal Emergency Management Agency (‘‘FEMA’’) reimbursement for costs related to the September 11 attack. The City has been largely reimbursed by the federal government for its direct costs for response and remediation of the World Trade Center site following the September 11 attack. A total of approximately $197 million for unpaid prior year education aid and $9 million of federal reimbursement for snow removal costs are included in fiscal year 2004.

Federal and State Categorical Grants

The City makes certain expenditures for services required by federal and State mandates which are then wholly or partially reimbursed through federal and State categorical grants. State categorical grants are received by the City primarily in connection with City welfare, education, higher education, health and mental health expenditures. The City also receives substantial federal categorical grants in connection with the federal Community Development Block Grant Program (‘‘Community Development’’). The federal government also provides the City with substantial public assistance, social service and education grants as well as reimbursement for all or a portion of certain costs incurred by the City in maintaining programs in a number of areas, including housing, criminal justice and health. All City claims for federal and State grants are subject to subsequent audit by federal and State authorities. The City provides a reserve for disallowances resulting from these audits which could be asserted in subsequent years. Federal grants are also subject to audit under the Single Audit Act Amendments of 1996. For a further discussion of federal and State categorical grants, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—6. Federal and State Categorical Grants.’’

The following table sets forth amounts of federal and State categorical grants received by the City for each of the City’s 2000 through 2004 fiscal years.

2000 2001 2002 2003 2004 (In Millions) Federal Community Development(1) ...... $ 264 $ 250 $ 281 $ 226 $ 240 Welfare(2) ...... 2,335 2,339 2,541 2,550 2,448 Education(2)...... 1,127 1,227 1,364 1,595 1,770 Other(2) ...... 691 734 1,911 1,247 957 Total...... $4,417 $4,550 $6,097 $5,618 $5,415

State Welfare ...... $1,382 $1,581 $1,585 $1,576 $1,724 Education ...... 4,829 5,388 5,592 5,834 5,873 Higher Education ...... 124 129 129 133 139 Health and Mental Health ...... 348 349 434 416 377 Other ...... 379 321 290 358 342 Total...... $7,062 $7,768 $8,030 $8,317 $8,455

(1) Amounts represent actual funds received and may be lower or higher than the appropriation of funds actually provided by the federal government for the particular fiscal year due either to underspending or the spending of funds carried forward from prior fiscal years. (2) A total of approximately $1.1 billion in non-recurring reimbursement from FEMA for costs relating to the September 11 attack is included in Welfare, Education and Other in fiscal year 2002.

20 SECTION V: CITY SERVICES AND EXPENDITURES Expenditures for City Services Three types of governmental agencies provide public services within the City’s borders and receive financial support from the City. One category is the mayoral agencies established by the City Charter which include, among others, the Police, Fire and Sanitation Departments. Another is the independent agencies which are funded in whole or in part through the City Budget by the City but which have greater independence in the use of appropriated funds than the mayoral agencies. Included in this category are certain Covered Organizations such as HHC and the Transit Authority. A third category consists of certain PBCs which were created to finance the construction of housing, hospitals, dormitories and other facilities and to provide other governmental services in the City. The legislation establishing this type of agency contemplates that annual payments from the City, appropriated through its Expense Budget, may or will constitute a substantial part of the revenues of the agency. Included in this category is, among others, the City University Construction Fund (‘‘CUCF’’). For information regarding expenditures for City services, see ‘‘SECTION VI: FINANCIAL OPERATIONS—2000-2004 Summary of Operations.’’ Federal and State laws require the City to provide certain social services for needy individuals and families who qualify for such assistance. The City receives the federal Temporary Assistance for Needy Families (‘‘TANF’’) block grant funds through the State which, supplemented by City and State contributions, fund the Family Assistance Program. The Family Assistance Program provides benefits for households with minor children subject, in most cases, to a five-year time limit. The five-year TANF limit will not have a fiscal impact on the City, assuming reauthorization of the federal block grant for another five years during the 108th Congress. The federal block grant expired September 30, 2002, and was recently extended through June 30, 2005. The Safety Net Assistance Program provides benefits for adults without minor children, families who have reached the Family Assistance Program time limit, and others, including certain immigrants, who are ineligible for the Family Assistance Program but are eligible for public assistance. Cash assistance benefits under the Safety Net Assistance Program are also subject to time and eligibility limits. Recipients who reach such time limits or fail to satisfy such eligibility requirements are transferred to non-cash assistance. The cost of the Safety Net Assistance Program is borne equally by the City and the State. The City also provides funding for many other social services such as day care, foster care, family planning, services for the elderly and special employment services for welfare recipients some of which are mandated, and may be wholly or partially subsidized, by either the federal or State government. See ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—6. FEDERAL AND STATE CATEGORICAL GRANTS.’’ As of July 2002, the Mayor assumed responsibility for the City’s public schools. The Board of Education (‘‘BOE’’) has been replaced by the Department of Education (‘‘DOE’’) which is overseen by a Chancellor, appointed by the Mayor, and the 13-member Panel for Educational Policy where the Mayor appoints 8 members including the Chancellor, and the Borough Presidents each appoints one member. The number of pupils in the school system is estimated to be approximately 1 million for the 2005 through 2009 fiscal years. Actual enrollment in fiscal years 2000 through 2004 has been 1,071,442, 1,072,677, 1,068,849, 1,065,471 and 1,060,414, respectively. See ‘‘SECTION VII: FINANCIAL PLAN—Assumptions— Expenditure Assumptions—2. OTHER THAN PERSONAL SERVICES COSTS—Department of Education.’’ The City’s system of higher education, consisting of its Senior Colleges and Community Colleges, is operated under the supervision of the City University of New York (‘‘CUNY’’). The City is projected to provide approximately 38.1% of the costs of the Community Colleges in the 2005 fiscal year. The State has full responsibility for the costs of operating the Senior Colleges, although the City is required initially to fund these costs. The City administers health services programs for the care of the physically and mentally ill and the aged. HHC maintains and operates the City’s eleven municipal acute care hospitals, four long-term care facilities, six free standing diagnostic and treatment centers, a certified home health-care program, many hospital-based and neighborhood clinics and a health maintenance organization. HHC is funded primarily by third party reimbursement collections from Medicare and Medicaid and by payments from Bad Debt/Charity Care Pools.

21 Medicaid provides basic medical assistance to needy persons. The City is required by State law to furnish medical assistance through Medicaid to all City residents meeting eligibility requirements established by the State. The State has assumed 81.2% of the non-federal share of long-term care costs, all of the costs of providing medical assistance to the mentally disabled, and 50% of the non-federal share of Medicaid costs for all other clients. The federal government pays 50% of Medicaid costs for federally eligible recipients. The City’s Expense Budget increased during the five-year period ended June 30, 2004, due to, among other factors, the costs of labor settlements and the impact of inflation on various other than personal services costs. Employees and Labor Relations Employees The following table presents the number of full-time and full-time equivalent employees of the City, including the mayoral agencies, the DOE and CUNY, at the end of each of the City’s 2000 through 2004 fiscal years. 2000 2001 2002 2003 2004 Education ...... 137,941 139,873 138,411 135,282 134,325 Police ...... 53,234 52,474 51,924 50,787 50,544 Social Services, Homeless and Children’s Services ...... 23,892 23,427 24,376 22,361 23,340 City University Community Colleges and Hunter Campus Schools ...... 6,274 6,293 5,756 6,039 6,450 Environmental Protection and Sanitation ...... 15,988 16,022 15,985 14,933 15,473 Fire ...... 16,055 15,728 15,854 15,180 15,522 All Other ...... 50,348 51,188 54,062 49,982 50,903 Total ...... 303,732 305,005 306,368 294,564 296,557

The following table presents the number of full-time employees of certain Covered Organizations, as reported by such Organizations, at the end of each of the City’s 2000 through 2004 fiscal years. 2000 2001 2002 2003 2004 Transit Authority ...... 46,082 47,689 47,954 47,694 47,400 Housing Authority ...... 14,867 14,704 14,694 14,673 13,841 HHC...... 35,509 34,968 35,377 35,956 35,833 Total(1)...... 96,458 97,361 98,025 98,323 97,074

(1) The definition of ‘‘full-time employees’’ varies among the Covered Organizations and the City. The foregoing tables include persons whose salaries or wages are paid by certain public employment programs, including programs funded under the Workforce Investment Act, which support employees in non-profit and State agencies as well as in the mayoral agencies and the Covered Organizations. Labor Relations Substantially all of the City’s full-time employees are members of labor unions. For those employees, wages, hours or working conditions may be changed only as provided for under collective bargaining agreements. Although State law prohibits strikes by municipal employees, strikes and work stoppages by employees of the City and the Covered Organizations have occurred. Collective bargaining for City employees is under the jurisdiction of either the New York City Office of Collective Bargaining (‘‘OCB’’), which was created under the New York City Collective Bargaining

22 Law, or the State Public Employment Relations Board (‘‘PERB’’), which was created under the State Employees Fair Employment Act. Collective bargaining matters relating to police, firefighters and pedagogical employees are under the jurisdiction of PERB. Under applicable law, the terms of future wage settlements could be determined through an impasse procedure which, except in the case of pedagogical employees, can result in the imposition of a binding settlement. Pedagogical employees do not have access to binding arbitration but are covered by a fact-finding impasse procedure under which a binding settlement may not be imposed. For information regarding the City’s assumptions with respect to the current status of the City’s agreements with its labor unions, the cost of future labor settlements and related effects on the Financial Plan, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Expenditure Assumptions—1. PERSONAL SERVICES COSTS.’’

Pensions The City maintains a number of pension systems providing benefits for its employees and employees of various independent agencies (including certain Covered Organizations). For further information regarding the City’s pension systems and the City’s obligations thereto, see ‘‘SECTION IX: OTHER INFORMATION—Pension Systems.’’

Capital Expenditures The City makes substantial capital expenditures to reconstruct, rehabilitate and expand the City’s infrastructure and physical assets, including City mass transit facilities, water and sewer facilities, streets, bridges and tunnels, and to make capital investments that will improve productivity in City operations. For additional information regarding the City’s infrastructure, physical assets and capital program, see ‘‘SECTION VII: FINANCIAL PLAN—Long-Term Capital Program’’ and ‘‘Financing Program.’’ The City utilizes a three-tiered capital planning process consisting of the Ten-Year Capital Strategy (previously, the Ten-Year Capital Plan), the Four-Year Capital Plan and the current-year Capital Budget. The Ten-Year Capital Strategy, which is published once every two years in conjunction with the Executive Budget, is a long-term planning tool designed to reflect fundamental allocation choices and basic policy objectives. The Four-Year Capital Plan translates mid-range policy goals into specific projects. The Capital Budget defines for each fiscal year specific projects and the timing of their initiation, design, construction and completion. On May 5, 2005, the City published the Ten-Year Capital Strategy for fiscal years 2006 through 2015. The Ten-Year Capital Strategy totals $62.4 billion, of which approximately 85% would be financed with City funds. See ‘‘SECTION VIII: INDEBTEDNESS—Indebtedness of the City and Certain Other Entities— Limitations on the City’s Authority to Contract Indebtedness.’’ The Ten-Year Capital Strategy includes: (i) $17.6 billion to construct new schools and improve existing educational facilities; (ii) $15.8 billion for improvements to the water and sewer system; (iii) $4.1 billion for expanding and upgrading the City’s housing stock; (iv) $3.1 billion for reconstruction or resurfacing of City streets; (v) $743 million for continued City-funded investment in mass transit; (vi) $4.9 billion for the continued reconstruction and rehabilitation of all four East River bridges and 149 other bridge structures; (vii) $1.6 billion to expand current jail capacity; and (viii) $582 million for construction and improvement of court facilities. Those programs in the Ten-Year Capital Strategy financed with City funds are currently expected to be funded primarily from the issuance of general obligation bonds issued by the City and bonds issued by the Water Authority. From time to time in the past, during recessionary periods when operating revenues have come under increasing pressure, capital funding levels have been reduced from those previously contemplated in order to reduce debt service costs. For information concerning the City’s long-term financing program for capital expenditures, see ‘‘SECTION VII: FINANCIAL PLAN—Financing Program.’’ The City’s capital expenditures, including expenditures funded by State and federal grants, totaled $27.9 billion during the 2000 through 2004 fiscal years. City-funded expenditures, which totaled

23 $24.4 billion during the 2000 through 2004 fiscal years, have been financed through the issuance of bonds by the City, the TFA, the Water Authority, TSASC, HHC and the Dormitory Authority of the State of New York (‘‘DASNY’’). The following table summarizes the major categories of capital expenditures in the City’s 2000 through 2004 fiscal years.

2000 2001 2002 2003 2004 Total (In Millions) Education ...... $1,296 $1,708 $1,765 $1,315 $1,192 $ 7,276 Environmental Protection ...... 797 830 1,037 1,301 1,631 5,596 Transportation ...... 637 577 724 739 763 3,440 Transit Authority(1) ...... 270 279 191 446 199 1,385 Housing...... 290 414 380 301 360 1,745 Hospitals ...... 43 34 62 67 35 241 Sanitation ...... 118 178 185 114 173 768 All Other(2) ...... 1,358 1,290 1,976 1,451 1,402 7,477 Total Expenditures(3)...... $4,809 $5,310 $6,320 $5,734 $5,755 $27,928 City-funded Expenditures(4)...... $4,096 $4,389 $5,436 $5,376 $5,133 $24,430

(1) Excludes the Transit Authority’s non-City portion of the Metropolitan Transportation Authority (‘‘MTA’’) capital program. (2) All Other includes, among other things, parks, correction facilities, public structures and equipment. (3) Total Expenditures for the 2000 through 2004 fiscal years include City, State and federal funding and represent amounts which include an accrual for work-in-progress. These figures for the 2000 through 2004 fiscal years are derived from the Comprehensive Annual Financial Report of the Comptroller. (4) City-funded Expenditures do not include accruals, but represent actual cash disbursements occurring during the fiscal year. The City annually issues a condition assessment and a proposed maintenance schedule for the major portion of its assets and asset systems which have a replacement cost of $10 million or more and a useful life of at least ten years, as required by the City Charter. For information concerning a report which sets forth the recommended capital investment to bring certain identified assets of the City to a state of good repair, see ‘‘SECTION VII: FINANCIAL PLAN—Long-Term Capital Program.’’

SECTION VI: FINANCIAL OPERATIONS

The City’s Basic Financial Statements and the auditors’ opinion thereon are presented in ‘‘APPENDIX B—FINANCIAL STATEMENTS.’’ Further details are set forth in the Comprehensive Annual Financial Report of the Comptroller for the fiscal year ended June 30, 2004, which is available for inspection at the Office of the Comptroller. For a summary of the City’s significant accounting policies, see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note A.’’ For a summary of the City’s operating results for the previous five fiscal years, see ‘‘2000-2004 Summary of Operations’’ below. Except as otherwise indicated, all of the financial data relating to the City’s operations contained herein, although derived from the City’s books and records, are unaudited. In addition, neither the City’s independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the Financial Plan or other estimates or projections contained elsewhere herein, nor have they expressed any opinion or any other form of assurance on such prospective financial information or its achievability, and assume no responsibility for, and disclaim any association with, all such prospective financial information. The Financial Plan is prepared in accordance with standards set forth in the Financial Emergency Act and the City Charter. The Financial Plan contains projections and estimates that are based on expectations and assumptions which existed at the time such projections and estimates were prepared. The estimates and projections contained in this Section and elsewhere herein are based on, among other factors, evaluations of historical revenue and expenditure data, analyses of economic trends and current and anticipated federal and State legislation affecting the City’s finances. The City’s financial projections are based upon numerous assumptions and are subject to certain contingencies and periodic revisions

24 which may involve substantial change. This prospective information is not fact and should not be relied upon as being necessarily indicative of future results. Readers of this Official Statement are cautioned not to place undue reliance on the prospective financial information. The City makes no representation or warranty that these estimates and projections will be realized. The estimates and projections contained in this Section and elsewhere herein were not prepared with a view towards compliance with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information.

2000-2004 Summary of Operations The following table sets forth the City’s results of operations for its 2000 through 2004 fiscal years in accordance with GAAP. The information regarding the 2000 through 2004 fiscal years has been derived from the City’s audited financial statements and should be read in conjunction with the notes accompanying this table and the City’s 2003 and 2004 financial statements included in ‘‘APPENDIX B—FINANCIAL STATEMENTS.’’ The 2000 through 2002 financial statements are not separately presented herein. For further information regarding the City’s revenues and expenditures, see ‘‘SECTION IV: SOURCES OF CITY REVENUES’’ and ‘‘SECTION V: CITY SERVICES AND EXPENDITURES.’’ Fiscal Year(1) Actual 2000 2001 2002 2003 2004 (In Millions) Revenues and Transfers Real Estate Tax(2) ...... $ 7,850 $ 8,246 $ 8,761 $10,063 $11,582 Other Taxes(3)(4) ...... 14,409 14,965 12,957 13,297 16,583 Miscellaneous Revenues(3) ...... 3,089 3,623 3,799 4,648 3,370 Other Categorical Grants ...... 432 492 615 1,006 956 Unrestricted Federal and State Aid(3) ...... 631 634 666 1,443 963 Federal Categorical Grants ...... 4,417 4,550 6,097 5,618 5,415 State Categorical Grants ...... 7,062 7,768 8,030 8,317 8,455 Less: Disallowances Against Categorical Grants ...... (5) (46) 0 (47) (27) Total Revenues and Transfers(5) ...... $37,885 $40,232 $40,865 $44,345 $47,297

Expenditures and Transfers

Social Services ...... $ 8,330 $ 8,717 $ 9,098 $ 9,321 $ 9,650 Board of Education ...... 10,674 11,545 11,718 12,673 13,061 City University ...... 398 408 440 464 516 Public Safety and Judicial ...... 5,649 5,875 6,434 6,197 6,118 Health Services ...... 1,777 1,959 2,132 2,241 2,418 Pensions(6) ...... 615 1,127 1,392 1,631 2,308 Debt Service(3)(7) ...... 3,339 2,522 1,371 2,309 3,472 MAC Debt Service Funding(3)(7) ...... 451 458 5 225 502 All Other(7) ...... 6,647 7,616 8,270 9,279 9,247 Total Expenditures and Transfers(5) ...... $37,880 $40,227 $40,860 $44,340 $47,292 Surplus(7) ...... $ 5 $ 5 $ 5 $ 5 $ 5

(1) The City’s results of operations refer to the City’s General Fund revenues and transfers reduced by expenditures and transfers. The revenues and assets of PBCs included in the City’s audited financial statements do not constitute revenues and assets of the City’s General Fund, and, accordingly, the revenues of such PBCs, other than net OTB revenues, are not included in the City’s results of operations. Expenditures required to be made by the City with respect to such PBCs are included in the City’s results of operations. For further information regarding the particular PBCs included in the City’s financial statements, see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note A.’’ (2) In fiscal years 2000, 2001, 2002, 2003 and 2004 Real Estate Tax includes $59.9 million, $89.4 million, $112.4 million, $119.6 million and $137.3 million, respectively, which was provided to the City by the State as a reimbursement for the reduced property tax revenues resulting from the State’s STAR Program. (3) Other Taxes and MAC Debt Service Funding include amounts paid to MAC by the State for debt service, operating expenses and State oversight costs from sales tax receipts, stock transfer tax receipts and State per capita aid otherwise payable by the

25 State to the City. For more information see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Other Taxes.’’ MAC Debt Service Funding is reduced by payments by the City of debt service on City obligations held by MAC. Personal income taxes exclude $247 million, $407 million, $451 million, $537 million, and $109 million in fiscal years 2000, 2001, 2002, 2003 and 2004, respectively, retained by the TFA. Debt Service does not include debt service on TFA bonds or TSASC bonds. Miscellaneous Revenues includes TSRs that are not retained by TSASC for debt service and operating expenses.

(4) Other Taxes includes transfers of net OTB revenues. For fiscal year 2001, Other Taxes excludes prior year real property penalty and interest of $37 million which is included in Interest Income under Miscellaneous Revenues. Other Taxes includes tax audit revenues. For further information regarding the City’s revenues from Other Taxes, see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Other Taxes.’’

(5) Total Revenues and Transfers and Total Expenditures and Transfers exclude Inter-Fund Revenues. Approximately $1.245 billion of fiscal year 2002 expenditures are costs related to the September 11 attack.

(6) For information regarding pension expenditures, see ‘‘SECTION IX: OTHER INFORMATION.’’

(7) The General Fund surplus is the surplus after discretionary and other transfers and expenditures. The City had General Fund operating revenues exceeding expenditures of $1.928 billion, $1.422 billion, $686 million, $2.949 billion and $3.192 billion before discretionary and other transfers and expenditures for the 2004, 2003, 2002, 2001 and 2000 fiscal years, respectively. Discretionary and other transfers are included in Debt Service, MAC Debt Service Funding and for transit and other subsidies in All Other.

26 Forecast of 2005 Results

The following table compares the forecast for the current fiscal year contained in the June Financial Plan submitted to the Control Board on June 29, 2004 (the ‘‘June 2004 Forecast’’) with the forecast contained in the Financial Plan submitted to the Control Board on May 9, 2005 (the ‘‘May 2005 Forecast’’). Each forecast was prepared on a basis consistent with GAAP. For information regarding recent developments, see Section I: Recent Financial Developments.’’

June May Increase/(Decrease) 2004 2005 from June 2004 Forecast Forecast Forecast (In Millions) REVENUES Taxes

General Property Tax ...... $11,550 $11,501 $ (49) Other Taxes...... 14,603 17,780 3,177 (1) Discretionary Transfer...... 400 400 — Tax Audit Revenue ...... 508 525 17 Tax Reduction Program ...... — (23) (23) Miscellaneous Revenues ...... 5,784 6,167 383 (2) Unrestricted Intergovernmental Aid ...... 562 562 — Anticipated State and Federal Actions ...... 450 — (450)(3) Less: Intra-City Revenues ...... (1,146) (1,289) (143) Disallowances Against Categorical Grants ...... (15) (15) — Subtotal – City Funds ...... $32,696 $35,608 $2,912 Other Categorical Grants ...... 807 856 49 Inter-Fund Revenues...... 348 358 10 Total City Funds & Inter-Fund Revenues ...... $33,851 $36,822 $2,971 Federal Categorical Grants ...... 4,733 6,873 2,140 (4) State Categorical Grants...... 8,626 9,021 395 (5) Total Revenues...... $47,210 $52,716 $5,506 EXPENDITURES Personal Services

Salaries and Wages ...... $17,062 $17,736 $ 674 (6) Pensions...... 3,376 3,387 11 Fringe Benefits ...... 5,152 5,182 30 Total – Personal Services ...... $25,590 $26,305 $ 715 Other Than Personal Services Medical Assistance...... 4,766 4,917 151 Public Assistance ...... 2,293 2,563 270 Pay-As-You-Go Capital ...... 200 200 — All Other...... 13,168 14,932 1,764 (7) Total – Other Than Personal Services ...... $20,427 $22,612 $2,185 Debt Service ...... 3,339 3,172 (167)(8) FY 2004 Budget Stabilization & Discretionary Transfers ...... (1,520) (1,523) (3) FY 2005 Budget Stabilization & Discretionary Transfers ...... 220 3,271 3,051 (9) MAC Debt Service ...... — 128 128 (10) General Reserve...... 300 40 (260) Total Expenditures...... $48,356 $54,005 $5,649 Less: Intra-City Expenses ...... (1,146) (1,289) (143) Net Total Expenditures...... $47,210 $52,716 $5,506

(1) The increase in Other Taxes is due to increases in personal income taxes of $936 million, sales and use taxes of $342 million, banking corporation tax of $208 million, general corporation tax of $171 million, unincorporated business tax of $181 million, mortgage recording tax of $638 million, real property transfer tax of $532 million, utility tax of $22 million, hotel occupancy tax of $28 million, commercial rent tax of $6 million and all other taxes of $50 million and the State’s STAR Program aid of $75 million offset by decreases of $13 million in cigarette taxes.

27 (2) The increase in Miscellaneous Revenues is due to increases of approximately $130 million in reimbursement to the City for revenues retained by MAC, $96 million in interest income based on the current forecast of the City cash balances, approximately $33 million in the sale of taxi medallions, $60 million in charges for services, $78 million in airport settlement and other rent, $21 million from permits and franchises, $24 million in fines, $143 million in intra-City revenues and a net increase of approximately $60 million in miscellaneous other revenues offset by decreases of approximately $107 million in TSRs, $2 million in water and sewer charges and $3 million in licenses, and the elimination of $150 million of asset sales to the Battery Park City Authority.

(3) The decrease in Anticipated State and Federal Actions reflects net State actions of $199 million, including the repeal of the sales tax exemption on clothing, that are now reflected elsewhere in the Financial Plan, the elimination of $201 million of anticipated State actions and $50 million of anticipated federal actions that did not occur.

(4) The increase in Federal Categorical Grants is due to $1 billion reimbursement from FEMA for insurance for claims relating to work at the World Trade Center site following the September 11 attack. $1.059 billion in categorical budget modifications processed between July 2004 and April 10, 2005, increases of $178 million in other grants offset by a decrease of $97 million in social services funding. For further information on the insurance claims, see ‘‘SECTION IX: OTHER INFORMATION— Litigation—Miscellaneous.’’

(5) The increase in State Categorical Grants is due to $402 million in categorical budget modifications processed between July 2004 and April 10, 2005, increases of $48 million in other grants offset by a decrease of $55 million in mental health grants.

(6) The increase in Personal Services is due to net increases of $140 million in education spending, $33 million in all other agency spending and $501 million in categorical budget modifications processed from July 2004 through April 10, 2005.

(7) The increase in Other Than Personal Services — All Other is due primarily to $1.915 billion in categorical budget modifications processed from July 2004 through April 10, 2005 including payment of $1 billion for insurance for claims relating to work at the World Trade Center site following the September 11 attack, an increase of $134 million in education spending, and a net increase of $37 million in all other spending offset by agency reduction programs of $122 million and a reduction of $200 million in prior year payables. For further information on the $1 billion for insurance, see ‘‘SECTION IX: OTHER INFORMATION— Litigation—Miscellaneous.’’

(8) The reduction in Debt Service is primarily due to lower than forecast short-term interest rates and the elimination of the note borrowing in fiscal year 2005.

(9) The increase in FY 2005 Budget Stabilization & Discretionary Transfers is due to the increase in the projected discretionary transfers into the General Debt Service Fund in fiscal year 2005 for debt service due in fiscal year 2006 and prepayments in fiscal year 2005 of subsidies due in fiscal year 2006.

(10) The increase in MAC Debt Service is due to a delay until the second quarter of fiscal year 2005 in the refinancing of outstanding MAC debt by STAR Corp. MAC debt service expense in fiscal year 2005 has been reimbursed from the proceeds of the STAR Corp. issuance. For further information, see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Other Taxes.’’

28 SECTION VII: FINANCIAL PLAN

The following table sets forth the City’s projected operations on a basis consistent with GAAP for the 2005 through 2009 fiscal years as contained in the Financial Plan. This table should be read in conjunction with the accompanying notes, ‘‘Actions to Close the Remaining Gaps’’ and ‘‘Assumptions,’’ below. For information regarding recent developments, see ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’ Fiscal Years(1)(2) 2005 2006 2007 2008 2009 (In Millions) REVENUES Taxes General Property Tax(3)...... $11,501 $12,326 $13,061 $14,021 $ 14,695 Other Taxes(4)(5)...... 17,780 16,414 16,552 16,690 17,639 Discretionary Transfers(6) ...... 400 947 — — — Tax Audit Revenue ...... 525 512 509 509 509 Tax Reduction Program(7) ...... (23) (235) (177) (17) (38) Miscellaneous Revenues(8) ...... 6,167 4,765 4,462 4,485 4,506 Unrestricted Intergovernmental Aid...... 562 562 562 562 562 Anticipated Federal Actions(9) ...... — 50 — — — Less: Intra-City Revenues...... (1,289) (1,249) (1,249) (1,249) (1,249) Disallowances Against Categorical Grants .... (15) (15) (15) (15) (15) Subtotal: City Funds ...... $35,608 $34,077 $33,705 $34,986 $ 36,609 Other Categorical Grants ...... 856 923 927 932 938 Inter-Fund Revenues(10) ...... 358 364 355 343 343 Total City Funds and Inter-Fund Revenues.... $36,822 $35,364 $34,987 $36,261 $ 37,890 Federal Categorical Grants...... 6,873 5,081 4,858 4,848 4,847 State Categorical Grants ...... 9,021 9,279 9,361 9,421 9,464 Total Revenues ...... $52,716 $49,724 $49,206 $50,530 $ 52,201 EXPENDITURES Personal Services Salaries and Wages...... $17,736 $17,771 $18,018 $18,246 $$18,518 Pension...... 3,387 4,762 5,018 4,911 4,783 Fringe Benefits ...... 5,182 5,552 5,811 6,154 6,477 Subtotal-Personal Services ...... $26,305 $28,085 $28,847 $29,311 $ 29,778 Other Than Personal Services Medical Assistance...... 4,917 5,024 5,172 5,319 5,458 Public Assistance ...... 2,563 2,408 2,353 2,353 2,353 Pay-As-You-Go Capital ...... 200 200 200 200 200 All Other ...... 14,932 13,902 13,885 14,005 14,184 Subtotal-Other Than Personal Services ...... $22,612 $21,534 $21,610 $21,877 $ 22,195 Debt Service ...... 3,172 3,368 4,161 4,517 4,880 FY 2004 Budget Stabilization & Discretionary Transfers(6)(11) ...... (1,523) — — — — FY 2005 Budget Stabilization & Discretionary Transfers(6)(12) ...... 3,271 (2,324) — — — MAC Debt Service & Administrative Expenses(13) ...... 128 10 10 10 — General Reserve...... 40 300 300 300 300 $54,005 $50,973 $54,928 $56,015 $ 57,153 Less: Intra-City Expenses ...... (1,289) (1,249) (1,249) (1,249) (1,249) Total Expenditures...... $52,716 $49,724 $53,679 $54,766 $ 55,904 GAP TO BE CLOSED...... $ — $ — $(4,473) $(4,236) $ (3,703)

(1) The four year financial plan for the 2005 through 2008 fiscal years, as submitted to the Control Board on June 29, 2004, contained the following projections for the 2005-2008 fiscal years: (i) for 2005, total revenues of $47.210 billion and total expenditures of $47.210 billion; (ii) for 2006, total revenues of $45.827 billion and total expenditures of $49.501 billion, with a

29 gap to be closed of $3.674 billion; (iii) for 2007, total revenues of $46.824 billion and total expenditures of $51.346 billion, with a gap to be closed of $4.522 billion; and (iv) for 2008, total revenues of $48.555 billion and total expenditures of $52.236 billion, with a gap to be closed of $3.681 billion. The four year financial plan for the 2004 through 2007 fiscal years, as submitted to the Control Board on June 30, 2003, contained the following projections for the 2004-2007 fiscal years: (i) for 2004, total revenues of $43.658 billion and total expenditures of $43.658 billion; (ii) for 2005, total revenues of $43.737 billion and total expenditures of $45.751 billion, with a gap to be closed of $2.014 billion; (iii) for 2006, total revenues of $44.134 billion and total expenditures of $47.372 billion, with a gap to be closed of $3.238 billion; and (iv) for 2007, total revenues of $45.186 billion and total expenditures of $48.471 billion, with a gap to be closed of $3.285 billion. The four-year financial plan for the 2003 through 2006 fiscal years, as submitted to the Control Board on June 26, 2002, contained the following projections for the 2003-2006 fiscal years: (i) for 2003, total revenues of $42.343 billion and total expenditures of $42.343 billion; (ii) for 2004, total revenues of $40.938 billion and total expenditures of $44.667 billion, with a gap to be closed of $3.729 billion; (iii) for 2005, total revenues of $41.861 billion and total expenditures of $46.085 billion, with a gap to be closed of $4.224 billion; and (iv) for 2006, total revenues of $42.920 billion and total expenditures of $47.510 billion, with a gap to be closed of $4.590 billion. The four-year financial plan for the 2002 through 2005 fiscal years, as submitted to the Control Board on June 13, 2001, contained the following projections for the 2002-2005 fiscal years: (i) for 2002, total revenues of $39.698 billion and total expenditures of $39.698 billion; (ii) for 2003, total revenues of $39.713 billion and total expenditures of $42.491 billion, with a gap to be closed of $2.778 billion; (iii) for 2004, total revenues of $40.976 billion and total expenditures of $43.587 billion, with a gap to be closed of $2.611 billion; and (iv) for 2005, total revenues of $42.228 billion and total expenditures of $44.464 billion, with a gap to be closed of $2.236 billion. (2) The Financial Plan combines the operating revenues and expenditures of the City, the DOE and CUNY. The Financial Plan does not include the total operations of HHC, but does include the City’s subsidy to HHC and the City’s share of HHC revenues and expenditures related to HHC’s role as a Medicaid provider. Certain Covered Organizations and PBCs which provide governmental services to the City, such as the Transit Authority, are separately constituted and their revenues (other than net OTB revenues), are not included in the Financial Plan; however, City subsidies and certain other payments to these organizations are included. Revenues and expenditures are presented net of intra-City items, which are revenues and expenditures arising from transactions between City agencies. (3) For a description of the effects of the real estate tax increase effective January 1, 2003, the State’s STAR Program, the property tax rebates to owner-occupants of houses, co-ops and condominiums, and other real estate tax reductions and other assumptions, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—2. REAL ESTATE TAX.’’ (4) Other Taxes includes transfers of net OTB revenues. Personal income taxes flow directly from the State to the TFA, and from the TFA to the City only to the extent not required by the TFA for debt service, reserves, operating expenses and contractual and other obligations incurred pursuant to the TFA indenture. Sales taxes will flow directly from the State to the TFA, after any required payments are made to MAC, to the extent necessary to provide statutory coverage. Other Taxes does not include amounts that are expected to be retained by the TFA for its debt service and operating expenses. Estimates of Debt Service do not include debt service on TFA obligations. (5) For Financial Plan assumptions, including the personal income tax and sales tax increases authorized by the State Legislature, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—3. Other Taxes.’’ (6) Discretionary Transfers reflects grants to the TFA of $400 million in fiscal year 2004 which increased personal income tax revenue by that amount in fiscal year 2005 and $947 million in fiscal year 2005 which will increase personal income tax revenue by that amount in fiscal year 2006. (7) Tax Reduction Program reflects the restoration of the local sales tax exemption on clothing purchases under $110 which requires State legislative approval and the extension of specific property tax exemptions to certain Mitchell-Lama properties and other tax relief programs which require State and City legislative approval. For information on the proposed sales tax exemption, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions—3. Other Taxes.’’ (8) Miscellaneous Revenues reflects the receipt by the City of TSRs, excluding amounts that have been or are expected to be retained by TSASC for debt service and operating expenses totaling approximately $473 million from fiscal years 2005 through 2009. The Financial Plan assumes that any amounts required to be trapped by TSASC will be released to the City. For information on TSASC trapping requirements, see ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Revenue Assumptions— 4. Miscellaneous Revenues.’’ Estimates of debt service do not include debt service on TSASC obligations. (9) The Financial Plan assumes additional federal assistance of $50 million in fiscal year 2006 which requires the approval of the federal government. For further information, see ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’ (10) Inter-Fund Revenues represents General Fund expenditures, properly includable in the Capital Budget, made on behalf of the Capital Projects Fund pursuant to inter-fund agreements. (11) FY 2004 Budget Stabilization & Discretionary Transfers reflects, in fiscal year 2004, the prepayment of $480 million in subsidies due in fiscal year 2005 and the discretionary transfer of $1.043 billion to prepay debt service due in fiscal year 2005. Budget stabilization and discretionary transfers totaled $1.923 billion in fiscal year 2004. (12) FY 2005 Budget Stabilization & Discretionary Transfers reflects projected discretionary transfers of $1.792 billion to prepay debt service due in fiscal year 2006, the prepayment in fiscal year 2005 of $532 million in other subsidies due in fiscal year 2006,

30 and a $947 million grant to the TFA in fiscal year 2005 which will increase personal income tax revenue by that amount in fiscal year 2006. Budget stabilization and discretionary transfers total $3.271 billion in fiscal year 2005. (13) MAC Debt Service & Administrative Expenses after fiscal year 2005 reflects retention by MAC of sales tax revenues for State oversight costs and MAC operating expenses. All outstanding MAC bonds were defeased with the proceeds of Sales Tax Asset Receivable Corporation bonds in November 2004. For further information see ‘‘SECTION IV: SOURCES OF CITY REVENUES— Other Taxes.’’

Various actions proposed in the Financial Plan are uncertain. See ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’ If these measures cannot be implemented, the City will be required to take other actions to decrease expenditures or increase revenues to maintain a balanced financial plan. See ‘‘Assumptions’’ and ‘‘Certain Reports’’ below.

Actions to Close the Remaining Gaps Although the City has maintained balanced budgets in each of its last twenty-four fiscal years and is projected to achieve balanced operating results for the 2005 and 2006 fiscal years, there can be no assurance that the gap-closing actions proposed in the Financial Plan can be successfully implemented or that the City will maintain a balanced budget in future years without additional State aid, revenue increases or expenditure reductions. Additional tax increases and reductions in essential City services could adversely affect the City’s economic base.

Assumptions The Financial Plan is based on numerous assumptions, including the condition of the City’s and the region’s economies and the concomitant receipt of economically sensitive tax revenues in the amounts projected. The Financial Plan is subject to various other uncertainties and contingencies relating to, among other factors, the continuing effects on the City economy of the September 11 attack, the extent, if any, to which wage increases for City employees exceed the annual wage costs assumed for the 2005 through 2009 fiscal years; realization of projected interest earnings for pension fund assets and current assumptions with respect to wages for City employees affecting the City’s required pension fund contributions; the willingness and ability of the State to provide the aid contemplated by the Financial Plan and to take various other actions to assist the City; the ability of HHC and other such entities to maintain balanced budgets; the willingness of the federal government to provide the amount of federal aid contemplated in the Financial Plan; the impact on City revenues and expenditures of federal and State welfare reform and any future legislation affecting Medicare or other entitlement programs; adoption of the City’s budgets by the City Council in substantially the forms submitted by the Mayor; the ability of the City to implement cost reduction initiatives, and the success with which the City controls expenditures; the impact of conditions in the real estate market on real estate tax revenues; and the ability of the City and other financing entities to market their securities successfully in the public credit markets. See ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’ Certain of these assumptions have been questioned by the City Comptroller and other public officials. See ‘‘SECTION VII: FINANCIAL PLAN—Certain Reports.’’ The projections and assumptions contained in the Financial Plan are subject to revision which may involve substantial change, and no assurance can be given that these estimates and projections, which include actions which the City expects will be taken but which are not within the City’s control, will be realized. For information regarding certain recent developments, see ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS.’’

Revenue Assumptions

1. GENERAL ECONOMIC CONDITIONS The Financial Plan assumes that after three consecutive years of contraction, the City’s economy experienced a respectable rebound in calendar year 2004. The economic projections contained therein assume that moderate growth will continue through calendar year 2005 with improvements in the labor market. The following table presents a forecast of the key economic indicators for the calendar years 2004 through 2009. This forecast is based upon information available in April 2005.

31 FORECAST OF KEY ECONOMIC INDICATORS

Calendar Years U.S. ECONOMY 2004 2005 2006 2007 2008 2009 Economic Activity and Income Real GDP (billions of 2000 dollars) ...... 10,842 11,248 11,589 11,939 12,312 12,701 Percent Change ...... 4.4 3.7 3.0 3.0 3.1 3.2 Pre-tax Corporate Profits ($ billions) ...... 979 1,313 1,292 1,326 1,345 1,367 Percent Change ...... 12.0 34.1 (1.6) 2.6 1.4 1.7 Personal Income ($ billions) ...... 9,671 10,220 10,756 11,326 11,962 12,619 Percent Change ...... 5.6 5.7 5.2 5.3 5.6 5.5 Non-Agricultural Employment (millions) ...... 131.5 133.7 135.4 136.5 137.5 138.5 Change From Prior Year ...... 1.5 2.3 1.6 1.2 0.9 1.1 Unemployment Rate ...... 5.5 5.2 5.1 5.2 5.2 5.2 CPI-All Urban (1982-84=100)...... 188.9 193.9 197.7 202.0 206.9 211.8 Percent Change ...... 2.7 2.6 2.0 2.2 2.4 2.4 Wage Rate ($ per year) ...... 40,738 42,246 44,076 45,776 47,625 49,502 Percent Change ...... 3.8 4.1 3.9 3.9 4.0 3.9 10-Year Treasury Bond Rate...... 4.3 5.0 5.9 5.8 5.8 6.1 Federal Funds Rate ...... 1.3 3.2 4.3 4.5 4.5 4.9

NEW YORK CITY ECONOMY Personal Income ($ billions) ...... 333 352 369 384 403 427 Percent Change ...... 5.9 5.6 4.9 4.0 5.0 5.9 Non-Agricultural Employment (thousands) ...... 3,542 3,582 3,619 3,644 3,671 3,702 Change From Prior Year ...... 10.0 39.9 37.8 24.8 26.4 31.4 Real Gross City Product (billions of 2000 dollars) . 438 450 457 460 478 497 Percent Change ...... 3.3 2.6 1.7 0.6 3.9 4.0 Wage Rate ($ per year) ...... 64,344 67,483 69,825 71,645 74,034 77,919 Percent Change ...... 6.6 4.9 3.5 2.6 3.3 5.2 CPI-All Urban NY-NJ Area (1982-84=100) ...... 204.8 211.0 216.1 221.8 227.2 232.9 Percent Change ...... 3.5 3.0 2.4 2.6 2.4 2.5

NEW YORK CITY REAL ESTATE MARKET Manhattan Primary Office Market Asking Rental Rate ($ per square foot) ...... 47.09 47.03 48.07 49.89 50.17 51.63 Percent Change ...... (2.6) (0.1) 2.2 3.8 0.6 2.9 Vacancy Rate – Percent ...... 11.7 10.3 10.5 10.6 10.5 9.7

Source: OMB.

2. REAL ESTATE TAX Projections of real estate tax revenues are based on a number of assumptions, including, among others, assumptions relating to the tax rate, the assessed valuation of the City’s taxable real estate, the delinquency rate, debt service needs, a reserve for uncollectible taxes and the operating limit. See ‘‘SECTION IV: SOURCES OF CITY REVENUES—Real Estate Tax.’’ The increase in average tax rate to $12.283 per $100 of assessed value enacted November 25, 2002 beginning in the second half of fiscal year 2003 and is projected to remain in effect for the forecast period through 2009. Projections of real estate tax revenues include $39.3 million, $85.3 million, $47.3 million, $46.3 million and $45.3 million net revenue from the sale of real property tax liens in fiscal years 2005 through 2009, respectively. Projections of real estate tax revenues include the effects of the State’s STAR Program which

32 will reduce the real estate tax revenues by an estimated $151.9 million, $152.7 million, $155.1 million, $155.1 million and $155.1 million in fiscal years 2005 through 2009, respectively. Projections of real estate tax revenues reflect the estimated cost of extending the current tax reduction for owners of cooperative and condominium apartments amounting to $258 million, $283 million, $300 million, $316 million and $330 million in fiscal years 2005 through 2009, respectively, and the cost of extending tax abatements through the Lower Manhattan Commercial Revitalization Program of $8 million, $7 million, $6 million, $6 million and $6 million in fiscal years 2005 through 2009, respectively. Projections of real estate tax revenues reflect the real estate tax rebate of $400 to owner-occupants of houses, co-ops and condomini- ums which has an estimated cost of $256 million in each of fiscal years 2005 through 2007. The delinquency rate was 2.7% for the 2003 fiscal year and 2.4% for fiscal year 2004. The Financial Plan projects delinquency rates of 2.6% in each of the 2005 through 2009 fiscal years. For information concerning the delinquency rates for prior years, see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Real Estate Tax—Collection of the Real Estate Tax.’’ For a description of proceedings seeking real estate tax refunds from the City, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’

3. OTHER TAXES The following table sets forth amounts of revenues (net of refunds) from taxes other than the real estate tax projected to be received by the City in the Financial Plan. The amounts set forth below exclude the Criminal Justice Fund and audit revenues. 2005 2006 2007 2008 2009 (In Millions) Personal Income(1)(2) ...... $ 5,472 $ 5,044 $ 4,895 $ 5,050 $ 5,465 General Corporation...... 1,844 1,908 2,052 2,091 2,249 Banking Corporation ...... 506 497 496 456 452 Unincorporated Business Income ...... 1,115 1,077 1,123 1,156 1,212 Sales(2) ...... 4,326 4,345 4,470 4,418 4,655 Commercial Rent...... 445 456 466 480 493 Real Property Transfer ...... 1,008 593 608 595 609 Mortgage Recording ...... 1,152 634 584 554 554 Utility...... 305 306 309 312 314 Cigarette ...... 123 120 118 114 112 Hotel ...... 254 267 277 291 306 All Other(3) ...... 1,230 1,167 1,154 1,173 1,218 Total...... $17,780 $16,414 $16,552 $16,690 $17,639

Note: Totals may not add due to rounding. (1) Personal Income does not include $509 million, $955 million, $983 million and $988 million of personal income tax revenues projected to be paid to the TFA for debt service and other expenses in the 2005, 2007, 2008 and 2009 fiscal years, respectively. Personal Income does not include the grants to the TFA of $400 million and $947 million in fiscal years 2004 and 2005, respectively, which increases personal income tax revenues by $400 million and $947 million in fiscal years 2005 and 2006, respectively. These projections include the effects of the State’s STAR Program, which will reduce personal income tax revenues by an estimated $632 million, $581 million, $608 million, $619 million and $640 million in the 2005 through 2009 fiscal years, respectively. The State will reimburse the City for such reduced revenues. These projections include the effects of the earned income tax credit which will reduce personal income tax revenues by approximately $57 million, $57 million, $62 million, $67 million and $72 million in fiscal years 2005 through 2009, respectively. (2) These projections include the effects of the enacted increase in the personal income tax rates for three years commencing January 1, 2003 which will generate $538 million and $308 million in fiscal years 2005 and 2006, respectively; the enacted one-eighth percent increase in the City portion of the sales tax for two years, commencing in June 2003, which will generate $118 million in fiscal year 2005; and the repeal of the sales tax exemption on clothing through May 31, 2005 which will generate $184 million in fiscal year 2005. Sales does not include the proposed early restoration of the local sales tax exemption on clothing purchases under $110 which would reduce sales tax revenues by $23 million, $230 million and $166 million in fiscal years 2005 through 2007, respectively, and which requires State legislative approval. (3) All Other includes, among others, OTB net revenues, beer and liquor taxes, and the automobile use tax. All Other also includes $784 million, $748 million, $760 million, $777 million and $823 million in fiscal years 2005 through 2009, respectively, to be provided to the City by the State as reimbursement for the reduced property tax and personal income tax revenues resulting from the State’s STAR Program.

33 The Financial Plan reflects the following assumptions regarding projected baseline revenues from Other Taxes: (i) with respect to personal income tax, strong growth in fiscal year 2005 resulting from growth in wage earnings from employment gains, strong finance sector bonuses on tax year 2004 coupled with robust growth in capital gains in calendar year 2004 and modest growth in capital gains in calendar year 2005 with slowing growth in fiscal years 2006 and 2007 and returning to trend growth from fiscal years 2008 through 2009, paralleling the national and local economies; (ii) with respect to general corporation tax revenues, a rebound in fiscal year 2005, reflecting strong New York Stock Exchange (‘‘NYSE’’) member firm profits in calendar year 2004 and robust corporate profits reflecting a rebounding local economy, with slowing growth in 2006 as the recovery matures and continuing on trend growth from fiscal years 2007 through 2009; (iii) with respect to banking corporation tax revenues, a continued rebound in fiscal year 2005 reflecting strength in capital markets in calendar year 2004, declining growth from fiscal years 2006 through 2009 reflecting narrowing interest rate margins and the slow growth of the national and local economies; (iv) with respect to unincorporated business tax revenues, growth in fiscal years 2005 reflecting continued strength in securities industry earnings and growth in service sector employment, declining growth in fiscal year 2006 reflecting modest growth in NYSE member firm profits and moderate growth in fiscal years 2007 through 2009 paralleling growth in the national and local economies; (v) with respect to sales tax revenues, growth in fiscal year 2005 reflecting wage earnings growth and continued recovery in the hotel and tourism industry, and moderate growth in fiscal years 2006 through 2009, reflecting growth in the national and local economies; (vi) with respect to real property transfer tax revenues, robust growth in fiscal year 2005 reflecting low mortgage interest rates and the attractiveness of New York City real estate as commercial property investments, and a slowdown in 2006 reflecting a retreat from peak transaction levels in the commercial and residential markets as interest rates slowly rise, and moderate growth from 2007 through 2009 as the national and local recoveries continue; (vii) with respect to mortgage recording tax revenues, a strong increase in fiscal year 2005 reflecting continued strength in refinancing, both commercial and residential, and a decline in 2006 as interest rates increase, and moderate growth from 2007 through 2009 as the national and local recoveries continue; and (viii) with respect to the commercial rent tax revenues, moderate growth in fiscal year 2005 through 2009 reflecting slowly improving vacancy rates and moderate increases in asking rents as the local economy grows.

4. MISCELLANEOUS REVENUES The following table sets forth amounts of miscellaneous revenues projected to be received by the City in the Financial Plan. 2005 2006 2007 2008 2009 (In Millions)

Licenses, Permits and Franchises ...... $ 376 $ 379 $ 371 $ 373 $ 370 Interest Income ...... 131 142 115 123 134 Charges for Services ...... 580 530 512 512 512 Water and Sewer Payments(1) ...... 931 998 1,001 1,017 1,037 Rental Income ...... 939 176 180 178 170 Fines and Forfeitures ...... 732 692 691 691 690 Other ...... 1,189 599 343 342 344 Intra-City Revenues ...... 1,289 1,249 1,249 1,249 1,249 Total...... $6,167 $4,765 $4,462 $4,485 $4,506

(1) Received from the Water Board. For further information regarding the Water Board, see ‘‘SECTION VII: FINANCIAL PLAN— Financing Program.’’ Miscellaneous Revenues—Rental Income reflects $838 million in fiscal year 2005, and approximately $93.5 million in fiscal years 2006, 2007, 2008 and 2009, respectively, for back rent and renegotiated lease payments for the City’s airports. The initial payment of approximately $780 million was received on November 29, 2004 and consists of an approximately $500 million lump sum payment and the annual rent payments for fiscal years 2002, 2003 and 2004. The payment is a result of the successful negotiation of an agreement between the City and the Port Authority to extend the current lease on John F. Kennedy

34 International and LaGuardia Airports through 2050 and increase the annual lease payments, and a resolution of all property issues related to the present or former streets at the World Trade Center site.

Miscellaneous Revenues—Other reflects $68 million, $238 million, $121 million, $120 million and $122 million of projected resources in fiscal years 2005 through 2009, respectively, from the receipt by the City of TSRs. The downgrade of major tobacco companies below investment grade has resulted in a trapping event for TSASC pursuant to which it must retain a portion of the TSRs it receives in a reserve account for the benefit of its bondholders. TSASC and the City are considering alternatives for eliminating the requirement to trap TSRs. The Financial Plan assumes that approximately $120 million trapped by TSASC in fiscal years 2004 and 2005 will be released to the City in fiscal year 2006 and that the requirement to trap TSRs will be eliminated in fiscal years 2006 through 2009. If the requirement to trap TSRs were to continue, the City would not receive approximately $180 million in fiscal year 2006 and approximately $60 million in each of fiscal years 2007 through 2009 of the amounts currently assumed in the Financial Plan. In addition, economic and legal uncertainties relating to the tobacco industry and the settlement, including pending anti-trust litigation challenging a State statute implementing the settlement agreement, may significantly affect the receipt of TSRs by TSASC and the City. Miscellaneous Revenues—Other does not reflect a total of $473 million that have been or are expected to be retained by TSASC during fiscal years 2005 through 2009 for debt service and operating expenses.

Miscellaneous Revenues—Other includes approximately $631 million in fiscal year 2005 to reimburse the City for revenues retained by MAC in fiscal years 2004 and 2005 due to the delayed implementation of the refinancing of outstanding MAC debt by STAR Corp. until the second quarter of fiscal year 2005. For further information see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Other Taxes.’’ Miscellaneous Revenues—Other includes, in fiscal year 2005, $97.9 million from the sale of 273 taxi medallions.

5. UNRESTRICTED INTERGOVERNMENTAL AID

The following table sets forth amounts of unrestricted intergovernmental aid projected to be received by the City in the Financial Plan. 2005 2006 2007 2008 2009 (In Millions)

State Revenue Sharing ...... $327 $327 $327 $327 $327 Other Aid ...... 235 235 235 235 235 Total...... $562 $562 $562 $562 $562

The Other Aid category primarily consists of approximately $223 million annually in fiscal years 2005 through 2009 from aid associated with the State takeover of long-term care Medicaid costs and $12 million in prior year claims settlements annually in fiscal years 2005 through 2009. The receipt of State Revenue Sharing funds could be affected by potential prior claims asserted by the State. For information concerning projected State budget gaps and the possible impact on State aid to the City, see ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS—The State.’’

35 6. FEDERAL AND STATE CATEGORICAL GRANTS

The following table sets forth amounts of federal and State categorical grants projected to be received by the City in the Financial Plan. 2005 2006 2007 2008 2009 (In Millions) Federal ...... Community Development...... $ 328 $ 269 $ 247 $ 247 $ 247 Welfare...... 2,357 2,101 2,030 2,029 2,029 Education...... 1,928 1,808 1,808 1,808 1,808 Other ...... 2,260 903 773 764 763 Total ...... $6,873 $5,081 $4,858 $4,848 $4,847 State ...... Welfare...... $1,809 $1,816 $1,868 $1,868 $1,868 Education...... 6,181 6,516 6,549 6,607 6,643 Higher Education ...... 175 188 188 188 188 Health and Mental Hygiene ...... 439 431 435 439 444 Other ...... 417 328 321 319 321 Total ...... $9,021 $9,279 $9,361 $9,421 $9,464

The Financial Plan assumes that all existing federal and State categorical grant programs will continue, unless specific legislation provides for their termination or adjustment, and assumes increases in aid where increased costs are projected for existing grant programs. For information concerning projected State budget gaps and the possible impact on State aid to the City, see ‘‘INTRODUCTORY STATEMENT’’ and ‘‘SECTION I: RECENT FINANCIAL DEVELOPMENTS—The State.’’ In addition, the Financial Plan reflects the receipt of $1 billion reimbursement from FEMA for insurance claims relating to work at the World Trade Center site following the September 11 attack. For further information see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Miscellaneous.’’ As of March 31, 2005, approximately 15.28% of the City’s full-time and full-time equivalent employees (consisting of employees of the mayoral agencies and the DOE) were paid by Community Development funds, water and sewer funds and from other sources not funded by unrestricted revenues of the City.

A major component of federal categorical aid to the City is the Community Development program. Pursuant to federal legislation, Community Development grants are provided to cities primarily to aid low and moderate income persons by improving housing facilities, parks and other improvements, by providing certain social programs and by promoting economic development. These grants are based on a formula that takes into consideration such factors as population, housing overcrowding and poverty.

The City’s receipt of categorical aid is contingent upon the satisfaction of certain statutory conditions and is subject to subsequent audits, possible disallowances and possible prior claims by the State or federal governments. The general practice of the State and federal governments has been to deduct the amount of any disallowances against the current year’s payment. Substantial disallowances of aid claims may be asserted during the course of the Financial Plan. The amounts of such disallowances attributable to prior years declined from $124 million in the 1977 fiscal year to $27 million in the 2004 fiscal year. This decrease reflects favorable experience with the level of disallowances in recent years, which may not continue. The federal government is auditing and reviewing claims by the City for Medicaid reimbursement for special education programs, which may form the basis for a recommendation of a disallowance of a substantial portion of such Medicaid reimbursements made to the City since 1990. The City has received approximately $100 million annually for such Medicaid reimbursements. The federal audit of Medicaid claims could also result in reduced Medicaid payments in the future. As of June 30, 2004, the City had an accumulated reserve of $277 million for all disallowances of categorical aid.

36 Expenditure Assumptions

1. PERSONAL SERVICES COSTS The following table sets forth projected expenditures for personal services costs contained in the Financial Plan. 2005 2006 2007 2008 2009 (In Millions) Wages and Salaries ...... $17,243 $17,180 $17,177 $17,130 $17,127 Pensions...... 3,387 4,762 5,018 4,911 4,783 Other Fringe Benefits ...... 5,182 5,552 5,811 6,154 6,477 Reserve for Collective Bargaining Department of Education...... 189 189 189 189 189 Other ...... 304 402 652 927 1,202 Reserve Subtotal ...... 493 591 841 1,116 1,391 Total ...... $26,305 $28,085 $28,847 $29,311 $29,778

The Financial Plan projects that the authorized number of City-funded full-time and full-time equivalent employees whose salaries are paid directly from City funds, as opposed to federal or State funds or water and sewer funds, will increase from an estimated level of 255,424 on June 30, 2005 to an estimated level of 257,211 by June 30, 2009. The Financial Plan reflects the costs of collective bargaining increases in the 2002-2005 round of bargaining consistent with the settlement with DC 37. DC 37 represents approximately 79,000 City employees. The DC 37 settlement provided for a $1,000 lump sum payment at settlement and a 3% wage increase on the first day of the second year and provided that any additional increases will be offset by negotiated productivity savings in subsequent fiscal years. In the case of DC 37, a 2% wage increase offset by productivity savings was negotiated for the third year with a possible additional 1% if the City and DC 37 can identify additional savings to offset the cost. Subsequent to the DC 37 settlement, the City reached settlements on terms substantially consistent with the pattern established by the DC 37 settlement with seventeen additional unions, which collectively represent approximately 33,000 employees. The Reserve for Collective Bargaining contains funds for the cost of collective bargaining increases for the 2002-2005 round of bargaining for all uniformed unions and unsettled education employees, consistent with the recent DC 37 settlement, and small amounts for the remaining unsettled contracts from the 2000-2002 round consistent with the terms of the 2000-2002 settlement with DC 37. In addition, the Reserve for Collective Bargaining contains funds for providing all employees a 1.25% wage increase in each year beyond current contracts. In all cases it is assumed that all of the contracts for the 2002-2005 round will be for the same term and at the same rates as the DC 37 settlement. In August 2004, an impasse was declared by PERB in the contract negotiations between the City and the Patrolmen’s Benevolent Association (‘‘PBA’’). An arbitrator was appointed by PERB and hearings concluded January 12, 2005. The parties are awaiting a decision. Since August 2004, five mediation sessions have been held between the City and the Uniformed Firefighters Association (‘‘UFA’’). The UFA also requested a declaration of impasse with PERB. The Sergeants Benevolent Association (‘‘SBA’’) requested a declaration of impasse with PERB in January 2005 and two mediation sessions have been held. The Detectives’ Endowment Association (‘‘DEA’’) requested a declaration of impasse with PERB and two mediation sessions have been held and a third session is scheduled for May 27, 2005. The United Federation of Teachers (‘‘UFT’’) requested a declaration of impasse with PERB and on March 15, 2005, PERB upheld the UFT request and ordered the appointment of a fact-finding panel. The parties have selected a panel and hearings are scheduled to commence June 10, 2005 and end June 29, 2005. Police, firefighters and UFT members are subject to the jurisdiction of PERB which, in the case of police and firefighters, can declare an impasse which can result in a binding settlement. UFT members are covered by a fact-finding procedure under which a binding settlement may not be imposed. For further

37 information on impasse procedures, see ‘‘SECTION V: CITY SERVICES AND EXPENDITURES—Employees and Labor Relations—Labor Relations.’’ For a discussion of the City’s pension systems, see ‘‘SECTION IX: OTHER INFORMATION—Pension Systems’’ and ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note E.5.’’

2. OTHER THAN PERSONAL SERVICES COSTS The following table sets forth projected other than personal services (‘‘OTPS’’) expenditures contained in the Financial Plan. 2005 2006 2007 2008 2009 (In Millions) Administrative OTPS ...... $11,401 $11,455 $11,445 $11,506 $11,617 Public Assistance...... 2,563 2,408 2,353 2,353 2,353 Medical Assistance ...... 4,917 5,024 5,172 5,319 5,458 HHC Support...... 368 277 261 248 241 Other ...... 3,363 2,370 2,379 2,451 2,526 Total ...... $22,612 $21,534 $21,610 $21,877 $22,195

Administrative OTPS and Energy The Financial Plan contains estimates of the City’s administrative OTPS expenditures for general supplies and materials, equipment and selected contractual services and estimates of energy costs in the 2005 and 2006 fiscal years. Thereafter, to account for inflation, OTPS expenditures are projected to rise by approximately 2.5% in fiscal years 2007 through 2009, respectively. Energy costs for each of the 2005 through 2009 fiscal years are assumed to vary annually, with total energy expenditures projected at $654 million in fiscal year 2005 and increasing to $705 million by fiscal year 2009. Public Assistance The average number of persons receiving income benefits under public assistance programs was 431,959 per month in the 2004 fiscal year and is projected to decrease to an average of 431,028 per month in the 2005 fiscal year. Of total public assistance expenditures in the City for the 2005 fiscal year, the City-funded portion is projected to be $528.4 million and is projected to increase to $534.1 million in fiscal year 2009. Medical Assistance Medical assistance payments projected in the Financial Plan consist of payments to voluntary hospitals, skilled nursing facilities, intermediate care facilities, home care and physicians and other medical practitioners. The City-funded portion of medical assistance payments is estimated at $4.015 billion for the 2005 fiscal year and is expected to increase to $4.529 billion in fiscal year 2009. Such payments include, among other things, City-funded Medicaid payments, but exclude City-funded Medicaid payments to HHC, as discussed below. City Medicaid costs (including City-funded Medicaid payments to HHC) assumed in the Financial Plan do not include 81.2% of the non-federal share of long-term care costs which have been assumed by the State. The Financial Plan projects savings of $989 million in fiscal year 2005 due to the State having assumed such costs, and projects such savings will increase to $1.1 billion in fiscal year 2009. Health and Hospitals Corporation HHC operates under its own section of the Financial Plan as a Covered Organization. HHC’s financial plan projects City-funded expenditures of $1.3 billion for the 2005 fiscal year, decreasing to $1.1 billion in fiscal year 2009. The City-funded expenditures in the 2005 fiscal year include $52.6 million for the care of prisoners and uniformed personnel, $172 million for prepayment of fiscal year 2006 City subsidy, $33.7 million for HHC debt service and $754 million for the City’s share of HHC Medicaid payments. HHC is projected to achieve balanced budgets in fiscal years 2005 through 2009 on a cash basis. Total receipts before implementation of the HHC gap-closing program are projected to be $4.6 billion in fiscal

38 year 2005 decreasing to $4.3 billion in fiscal year 2009. Total disbursements before implementation of the HHC gap-closing program are projected to be $4.5 billion, in fiscal year 2005 increasing to $4.9 billion in fiscal year 2009. These projections assume: (i) increases in other than personal services costs and fringe benefits in fiscal years 2005 through 2009 and (ii) growth in Medicaid revenue between fiscal years 2005 and 2009. Significant changes have been and may be made in Medicaid, Medicare and other third-party payor programs, which could have adverse impacts on HHC’s financial condition.

Other The projections set forth in the Financial Plan for OTPS-Other include the City’s contributions to NYCT, the Housing Authority, CUNY and subsidies to libraries and various cultural institutions. They also include projections for the cost of future judgments and claims which are discussed below under ‘‘Judgments and Claims’’, $200 million for pay-as-you-go capital in each of fiscal years, 2005 through 2009, and the payment of $1 billion for insurance for claims relating to work at the World Trade Center site following the September 11 attack. For more information, see ‘‘SECTION IX: OTHER INFORMATION— Litigation—Miscellaneous.’’ In the past, the City has provided additional assistance to certain Covered Organizations which had exhausted their financial resources prior to the end of the fiscal year. No assurance can be given that similar additional assistance will not be required in the future.

New York City Transit In May 2005, the City prepared a financial plan for NYCT covering its 2005 through 2008 fiscal years (the ‘‘NYCT Financial Plan’’). NYCT’s fiscal year coincides with the calendar year. For 2005, the NYCT Financial Plan projects $5.5 billion in revenues and $6.9 billion in expenses, leaving a budget gap of $1.5 billion. This gap will be offset by a $981.6 million depreciation adjustment, approximately $173.2 million in anticipated cash flow adjustments including reserve funds and additional receipts, $16.7 million in an MTA gap-closing program, and funds made available from a $366.0 million cash basis surplus in 2004 leaving a net surplus of $79 million in 2005. NYCT’s cash basis budget will be balanced for fiscal year 2005. City assistance in 2005 to NYCT’s operating budget is $251.2 million, in addition to $232.6 million in real estate tax revenue dedicated for NYCT’s use. The NYCT Financial Plan forecasts budget gaps of $668 million, $867.3 billion, and $1.02 billion in 2006 through 2008, respectively, after depreciation, before the implementation of cash flow adjustments and additional gap-closing actions. The Financial Plan does not require that NYCT’s out-year gaps be funded. The Financial Plan assumes that the gaps in 2006 through 2008 will be closed in part by productivity measures, increased user charges, additional management actions, reduced service levels, or some combination of these actions. On July 29, 2004, the MTA Board approved a proposed new five-year, $27.8 billion capital plan for the MTA for 2005 through 2009 (the ‘‘2005-2009 Capital Program’’), including $17.2 billion for its basic infrastructure program, to be funded with federal, State and City capital funds, MTA bonds, and other MTA resources. The 2005-2009 Capital Program proposed to invest $12 billion of that $17.2 billion in the NYCT core system and to over $5 billion in NYCT network expansion and security upgrades. The Capital Program Review Board (‘‘CPRB’’) rejected the 2005-2009 Capital Program and on April 28, 2005, the MTA Board released an amended 2005-2009 Capital Program (the ‘‘Amended 2005-2009 Capital Program’’). The Amended 2005-2009 Capital Program includes $21.15 billion for all MTA agencies, including $16 billion for its basic infrastructure program, $11.3 billion of which would be invested in the NYCT core system, and over $5 billion for NYCT network expansion and security upgrades. The Amended 2005-2009 Capital Program includes approximately $437.4 million to be funded with proceeds of City general obligation bonds and approximately $2 billion for extension of the Number 7 subway line expected to be funded with proceeds of bonds to be issued by HYIC, which will be secured by and payable from payments in lieu of taxes and other revenues generated by development in the Hudson Yards area. To the extent such payments in lieu of taxes and other revenues are insufficient to pay interest on the HYIC bonds, the interest is expected to be paid by the City, subject to appropriation. The Amended 2005-2009 Capital Program has been submitted to the CPRB for approval. In the absence of CPRB approval of the Amended 2005-2009 Capital Program, the MTA may proceed as approved by the MTA Board with only that work funded by federal, City or other third-party sources, or cash resources.

39 The Amended 2005-2009 Capital Program follows the $17.9 billion capital program for 2000 through 2004, which included $12.3 billion for NYCT. The capital program for 2000 through 2004 superseded the previous capital program for the period 1995 through 1999, which totaled $13.2 billion, with $9.3 billion in projects for NYCT. There can be no assurance that all the necessary governmental actions for the Amended 2005-2009 Capital Program will be taken, that funding sources currently identified will not be reduced or eliminated, or that parts of the capital program will not be delayed or reduced. If the MTA’s capital program is delayed or reduced, ridership and fare revenues may decline which could, among other things, impair the MTA’s ability to meet its operating expenses without additional assistance.

Department of Education State law requires the City to provide City funds for the DOE each year, beginning in fiscal year 2004, in an amount not less than the amount appropriated for the preceding fiscal year, excluding amounts for debt service and pensions for the DOE. Such City funding must be maintained, unless total City funds for the fiscal year are estimated to be lower than in the preceding fiscal year, in which case the mandated City funding for the DOE may be reduced by an amount up to the percentage reduction in total City funds. In June 2003, the State Court of Appeals held that, with respect to education in the City, the State was not in compliance with a State Constitutional mandate requiring the provision of a sound basic education to children. The court directed that by July 30, 2004, the State must have determined the actual cost of providing a sound basic education in the City and enacted appropriate reforms. The State did not implement a compliance plan by the deadline, and on August 3, 2004 the State Supreme Court issued an order appointing a three member panel to report on the measures taken by the State to bring the State’s funding mechanism into Constitutional compliance and to identify the areas, if any, in which such compliance is lacking. The panel’s report was released on November 30, 2004. It recommends additional operational funding of $5.63 billion per year for education in the City, phased in over four years beginning with $1.41 billion in fiscal year 2006, and additional spending on capital improvements for education in the City, over five years, of $9.179 billion. The report recommends that, in the first instance, the State Legislature should allocate the responsibility for providing such funds between the State and the City. On February 14, 2005, the State Supreme Court confirmed the panel’s report. The State filed an appeal on April 18, 2005. The City maintains that the State is responsible for providing all required incremental education funding but the State has proposed that the City cover a substantial portion of such funding. The ultimate cost to the City is uncertain. For additional information concerning school funding costs, see ‘‘SECTION VII: FINANCIAL PLAN—Certain Reports.’’

Judgments and Claims In the fiscal year ended on June 30, 2004, the City expended $591 million for judgments and claims, $159.8 million of which was reimbursed by HHC. The Financial Plan includes provisions for judgments and claims of $570.2 million, $630.7 million, $666.5 million, $709.8 million and $762.7 million for the 2005 through 2009 fiscal years, respectively. These projections incorporate a substantial amount of claims costs attributed to HHC for which HHC will reimburse the City. These amounts are estimated at $159.9 million in fiscal year 2005 and $189.9 million for each of fiscal years 2006 through 2009. The City is a party to numerous lawsuits and is the subject of numerous claims and investigations. The City has estimated that its potential future liability on account of outstanding claims against it as of June 30, 2004 amounted to approximately $4.4 billion. This estimate was made by categorizing the various claims and applying a statistical model, based primarily on actual settlements by type of claim during the preceding ten fiscal years, and by supplementing the estimated liability with information supplied by the City’s Corporation Counsel. For further information regarding certain of these claims, see ‘‘SECTION IX: OTHER INFORMATION—Litigation.’’ In addition to the above claims, numerous real estate tax certiorari proceedings involving allegations of inequality of assessment, illegality and overvaluation are currently pending against the City. The City’s Financial Statements for the year ended June 30, 2004 include an estimate that the City’s liability in the certiorari proceedings, as of June 30, 2004, could amount to approximately $634 million. Provision has

40 been made in the Financial Plan for estimated refunds of $224 million, $227 million, $215 million, $210 million and $205 million for the 2005 through 2009 fiscal years, respectively. For further information concerning these claims, certain remedial legislation related thereto and the City’s estimates of potential liability, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes’’ and ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note D.5.’’

3. DEBT SERVICE Debt service estimates for the 2005 through 2009 fiscal years include estimates of debt service costs on outstanding City bonds and notes and conduit debt and future debt issuances based on current and projected future market conditions. Such debt service estimates also include estimated payments pursuant to interest rate exchange agreements.

Certain Reports From time to time, the Control Board staff, OSDC, the City Comptroller, the IBO and others issue reports and make public statements regarding the City’s financial condition, commenting on, among other matters, the City’s financial plans, projected revenues and expenditures and actions by the City to eliminate projected operating deficits. Some of these reports and statements have warned that the City may have underestimated certain expenditures and overestimated certain revenues and have suggested that the City may not have adequately provided for future contingencies. Certain of these reports have analyzed the City’s future economic and social conditions and have questioned whether the City has the capacity to generate sufficient revenues in the future to meet the costs of its expenditure increases and to provide necessary services. It is reasonable to expect that reports and statements will continue to be issued and to engender public comment. On March 3, 2005, the City Comptroller released a report on the preliminary budget for fiscal year 2006 and the February Financial Plan. The report states that the City’s financial outlook appears to have stabilized for the current fiscal year and fiscal year 2006 but that over the longer term, multi-billion dollar deficits are projected. In his report, the City Comptroller identifies net risks for fiscal years 2005 through 2009 which, when added to the projected results in the February Financial Plan, result in additional resources of $185 million in fiscal year 2005 and gaps of $478 million, $3.7 billion, $3.7 billion and $3.5 billion in fiscal years 2006 through 2009, respectively. The risks and possible resources set forth in the City Comptroller’s report include: (i) the possibility that taxes could be greater than projected in the February Financial Plan by $250 million, $256 million, and $156 million in fiscal years 2005 through 2007, respectively, and less than projected by $72 million and $191 million in fiscal years 2008 and 2009, respectively; (ii) the possibility that federal actions could be $250 million less than projected in the February Financial Plan in fiscal year 2006; (iii) the possibility that State actions could be $300 million less than projected in the February Financial Plan in fiscal year 2006; (iv) possible increased overtime expenditures of $50 million and $150 million in each of fiscal years 2005 and 2006 and $75 million in fiscal years 2007 through 2009; and (v) possible failure to realize expected savings from teacher sabbatical reductions of $15 million in fiscal year 2005 and $34 million in each of fiscal years 2006 through 2009. In addition to the risks identified in the report, the report notes that there are several major issues that are likely to be costly to the City, although their precise costs and timing are difficult to predict. The report notes that the City has made no provision for wage increases for the next round of collective bargaining for civilian employees and that this contract expires on June 30, 2005. The report also notes that in the absence of offsetting productivity increases, it will cost the City approximately $39 million annually for every percentage point wage increase for these employees. The report notes that the February Financial Plan includes funding to support future wage increases for teachers and uniformed employees patterned after the DC 37 agreement for civilian employees and notes that every percentage point over the DC 37 wage increase applied to teachers and uniformed employees would cost the City $145 million annually. The report also notes that it remains uncertain whether the City will be required to provide any of the increased education funding required by the State Supreme Court’s ruling in the Campaign for Fiscal Equity litigation. The report states that the City has projected that the HHC will face

41 budget gaps of between $485 million and $636 million during fiscal years 2006 through 2009, and, noting that the $150 million prepayment in the current fiscal year of the fiscal year 2006 City subsidy of HHC has averted a decline in HHC’s cash balance, states that the City may have to consider a more permanent increase in the level of support for HHC. The report also forecasts that the City’s economic recovery is expected to continue in 2005 and 2006 and that the City’s Gross City Product will grow by 2.3 percent in 2005, which is less than the 3.0 percent growth in 2004 and slightly lower than the City’s forecast of 2.4 percent. On February 23, 2005, the staff of OSDC issued a report on the February Financial Plan. The report noted that while the February Financial Plan projects a balanced budget for fiscal year 2005, the City projects large out-year budget gaps because nonrecurring resources that were used to balance the fiscal year 2005 budget have not been replaced with recurring resources, nondiscretionary spending is growing faster than revenues and temporary taxes that were authorized by the State at the City’s request are set to expire next year. The report identified net risks of $340 million, $550 million, $450 million and $450 million for fiscal years 2006 through 2009, respectively, which, when added to the gaps projected in the February Financial Plan, would result in gaps of $340 million, $4.3 billion, $4.0 billion and $3.6 billion in fiscal years 2006 through 2009, respectively. The risks to the February Financial Plan identified in the report include: (i) higher labor costs totaling $290 million in fiscal year 2006 and approximately $300 million annually in subsequent fiscal years if the City is unable to apply the productivity terms of the current DC 37 agreement to agreements with the unions that represent teachers, police officers and firefighters, each of which has reached a negotiating impasse with the City and is seeking a larger wage increase than provided in the DC 37 settlement; (ii) possible failure to receive assumed additional assistance from the State of $250 million in fiscal year 2006, $200 million in fiscal year 2007 and $100 million in each of fiscal years 2008 and 2009; (iii) possible increased spending for uniformed agency overtime of $50 million in each of fiscal years 2006 through 2009; and (iv) possible failure to receive the $250 million of federal assistance in fiscal year 2006 anticipated in the February Financial Plan. The report noted that such risks could be offset by $350 million from higher-than-planned tax revenues in fiscal year 2006, and $150 million in fiscal year 2006 from the possible delay of an asset sale from fiscal year 2005 into fiscal year 2006. In addition, the report noted other risks and potential offsets including the possibility that the City will be required to reduce the projected TSR’s because a downgrade of tobacco manufacturers’ investment ratings required TSASC to increase its reserves, by $120 million in fiscal year 2006, and approximately $60 million annually in fiscal years 2007 through 2009, respectively, and the payment of future wage increases at the projected inflation rate without offsetting productivity savings, resulting in potential costs of $280 million, $800 million, $1.3 billion and $1.8 billion in fiscal years 2006 through 2009, respectively. The report notes that the City actuary is contemplating various pension changes that could produce budgetary savings of at least $325 million in fiscal year 2006 and $200 million in fiscal year 2007, and that these changes require approval of the pension fund boards of trustees, and, in some cases, the State Legislature. The report identified potential offsets of $200 million in each of fiscal years 2006 through 2009 from the use of funds for current expenses rather than the planned pay-as-you-go capital financing. With respect to the possible risk for additional education spending, the report noted that the trial court hearing a challenge to the State education distribution formula had recommended that the State implement a funding plan that would phase in over a four-year period beginning next year an increase of $5.6 billion in funding for the City schools as well as provide for an additional $9.2 billion over a five year period for capital projects for City schools. While the State plans to appeal, if the Court of Appeals upholds the ruling, and if the State Legislature requires the City to contribute 40 percent of the cost of the settlement as recommended by the Governor, the report estimates City education costs could increase by $525 million in fiscal year 2006, $1.0 billion in fiscal year 2007, $1.7 billion in fiscal year 2008 and $2.2 billion in fiscal year 2009. The report further noted the existence of a number of issues that could have a significant impact on the City during the February Financial Plan period, including the impact of financial difficulties at HHC and the planned issuance by the HYIC of $3 billion in bonds to finance infrastructure improvements to spur private development on the far West Side of Manhattan. The report notes that the City intends to

42 fund the interest costs on HYIC debt as long as revenues are insufficient to cover these costs and also questions the TFA’s planned possible purchase of up to $750 million of HYIC bonds as a credit enhancement to those HYIC bonds. The report also expressed concern that the growth in the national and local economies is expected to slow over the period covered by the February Financial Plan and that continued high oil prices, high debt levels for consumers and business, large and expanding federal budget and trade deficits, the potential cost of social security reform and the significantly lower value of the dollar, and other factors, could affect the strength of the City’s economy. On March 22, 2005, the staff of the Control Board issued a report reviewing the February Financial Plan. In its report, the staff notes that the City has adopted a fiscal year 2005 budget that will end the year in balance and with a surplus that can be used to reduce the fiscal year 2006 budget gap. The report identifies possible additional net resources of $275 million for fiscal year 2005, net risks of $399 million and $168 million in fiscal years 2006 and 2007, respectively, and possible net resources of $32 million for each of fiscal years 2008 and 2009, which, when combined with the results projected in the Financial Plan, result in an increase of estimated surplus of $275 million in fiscal year 2005 and estimated gaps of $399 million, $3.9 billion, $3.5 billion and $3.1 billion for fiscal years 2006 through 2009, respectively. These risks include: (i) the possibility that overtime could be greater than expected by $99 million in fiscal year 2006 and $118 million in each of fiscal years 2007 through 2009; (ii) the risk of failing to realize projected savings in pension and health insurance expenses of $325 million and $200 million in fiscal years 2006 and 2007, respectively; (iii) the risk of failing to complete the proposed sale of land to the Battery Park City Authority of $150 million in fiscal year 2005, and (iv) the risk of failing to realize assumed federal budget relief of $250 million in fiscal year 2006. The report further notes that these risks could be partially offset by greater than projected non-property tax revenues of $375 million and $150 million in fiscal years 2005 and 2006, respectively, and by increased miscellaneous revenues of $50 million in fiscal year 2005, $125 million in fiscal year 2006 and $150 million in each of fiscal years 2007 through 2009. In addition to the risks identified in the report, the report notes that spending continues to grow at rates greater than the projected growth in tax revenues in areas such as fringe benefits, pensions, Medicaid and debt service, and identifies possible expenditures resulting from the Campaign for Fiscal Equity litigation and possible variance from the City’s assumptions about future labor costs as uncertainties that could have budgetary impact. On May 19, 2005, the IBO released a report analyzing the Mayor’s Executive Budget for fiscal year 2006 and reviewing expected fiscal year 2005 results and the Financial Plan. In this report, the IBO expects the City to end the 2005 fiscal year with a surplus of $3.3 billion, and expects fiscal year 2006 to close with a surplus of $280 million. The IBO report states that growth of the City economy may slow in fiscal year 2006 and that, as a result, tax collections may not exceed expectations to the extent they have in previous years, making it less likely that the projected fiscal year 2007 gap will be addressed through a sizable surplus from fiscal year 2006. The IBO report projects that gaps will be less than projected in the Financial Plan by $19 million, $246 million and $451 million in fiscal years 2007, 2008 and 2009, respectively. The IBO report identifies the terms of future labor agreements with the teachers, police, fire, sanitation, and correction officers unions, whose members are currently working without contracts, and other municipal unions, as an uncertainty in the Executive Budget and the Financial Plan. The report also identifies the resolution of the Campaign for Fiscal Equity litigation as an uncertainty which is unlikely to be settled until at least next year. Long-Term Capital Program The City makes substantial capital expenditures to reconstruct and rehabilitate the City’s infrastruc- ture and physical assets, including City mass transit facilities, water and sewer facilities, streets, bridges and tunnels, and to make capital investments that will improve productivity in City operations. The City utilizes a three-tiered capital planning process consisting of the Ten-Year Capital Strategy, the Four-Year Capital Plan and the current-year Capital Budget. The Ten-Year Capital Strategy is a long-term planning tool designed to reflect fundamental allocation choices and basic policy objectives. The Four-Year Capital Plan translates mid-range policy goals into specific projects. The Capital Budget defines specific projects and the timing of their initiation, design, construction and completion.

43 City-funded commitments, which were $344 million in fiscal year 1979, are projected to reach $6.9 billion in fiscal year 2005. City-funded expenditures are forecast at $5.3 billion in fiscal year 2005; total expenditures are forecast at $5.9 billion in fiscal year 2005. For additional information concerning the City’s capital expenditures and the Ten-Year Capital Strategy covering fiscal years 2006 through 2015, see ‘‘SECTION V: CITY SERVICES AND EXPENDITURES—Capital Expenditures.’’ The following table sets forth the major areas of capital commitment projected for the 2005 through 2009 fiscal years. See ‘‘SECTION V: CITY SERVICES AND EXPENDITURES—Capital Expenditures.’’ See ‘‘SECTION VIII: INDEBTEDNESS—Indebtedness of the City and Certain Other Entities—Limitations on the City’s Authority to Contract Indebtedness.’’

2005-2009 CAPITAL COMMITMENT PLAN

2005 2006 2007 2008 2009 Total City All City All City All City All City All City All Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds (In Millions) Mass Transit(1) ...... $ 185 $ 185 $ 86 $ 250 $ 70 $ 92 $ 66 $ 66 $ 66 $ 66 $ 474 $ 660 Roadway, Bridges ...... 429 614 930 1,031 971 1,230 588 776 614 799 3,533 4,451 Environmental Protection(2)...... 2,703 2,846 2,100 2,214 2,393 2,421 1,331 1,359 1,273 1,301 9,799 10,141 Education ...... 2,739 2,739 814 2,630 910 2,625 1,010 2,625 1,210 2,625 6,681 13,245 Housing...... 420 583 393 553 319 417 266 413 238 300 1,637 2,267 Sanitation...... 139 139 660 660 212 212 252 252 108 108 1,372 1,372 City Operations/Facilities . 3,554 3,811 3,227 3,523 2,184 2,228 1,440 1,465 990 1,021 11,396 12,047 Economic and Port Development ...... 462 629 399 425 604 604 137 137 63 63 1,664 1,859 Reserve for Unattained Commitments...... (3,717) (3,717) (597) (597) 123 123 943 943 514 514 (2,734) (2,734) Total Commitments(3) . $ 6,913 $ 7,830 $8,013 $10,691 $7,785 $9,951 $6,033 $8,036 $5,077 $6,798 $33,821 $43,306

Total Expenditures(4) . . $ 5,323 $ 5,901 $6,018 $ 7,004 $6,546 $7,896 $6,755 $8,545 $6,369 $8,301 $31,011 $37,647

Note: Totals may not add due to rounding. (1) Excludes NYCT’s non-City portion of the MTA capital program. (2) Includes water supply, water mains, water pollution control, sewer projects and related equipment. (3) Commitments represent contracts registered with the City Comptroller, except for certain projects which are undertaken jointly by the City and State. (4) Expenditures represent cash payments and appropriations planned to be expended for capital costs, excluding amounts for original issue discount. Currently, if all City capital projects were implemented, expenditures would exceed the City’s financing projections in the current fiscal year and subsequent years. The City has therefore established capital budgeting priorities to maintain capital expenditures within the available long-term financing. Due to the size and complexity of the City’s capital program, it is difficult to forecast precisely the timing of capital project activity so that actual capital expenditures may vary from the planned annual amounts. In November 2004, the City issued an Asset Information Management System Report (the ‘‘AIMS Report’’), which is its annual assessment of the asset condition and a proposed maintenance schedule for its assets and asset systems which have a replacement cost of $10 million or more and a useful life of at least ten years, as required by the City Charter. This report does not reflect any policy considerations which could affect the appropriate amount of investment, such as whether there is a continuing need for a particular facility or whether there have been changes in the use of a facility. The AIMS Report estimated that $4.88 billion in capital investment would be needed for fiscal years 2006 through 2009 to bring the assets to a state of good repair. The report also estimated that $313 million, $180 million, $214 million and $197 million should be spent on maintenance in fiscal years 2006 through 2009, respectively. The recommended capital investment for each inventoried asset is not readily comparable to the capital spending allocated by the City in the Four-Year Capital Plan and the Ten-Year Capital Strategy.

44 Only a portion of the funding set forth in the Four-Year Capital Plan is allocated to specifically identified assets, and funding in the subsequent years of the Ten-Year Capital Strategy is even less identifiable with individual assets. Therefore, there is a substantial difference between the amount of investment recommended in the report for all inventoried City assets and amounts allocated to the specifically identified inventoried assets in the Four-Year Capital Plan. The City also issues an annual report (the ‘‘Reconciliation Report’’) that compares the recommended capital investment with the capital spending allocated by the City in the Four-Year Capital Plan to the specifically identified inventoried assets. The most recent Reconciliation Report, issued in May 2004, concluded that the capital investment in the Four-Year Capital Plan for the specifically identified inventoried assets funds 49% of the total investment recommended in the preceding AIMS Report issued in October 2003. Capital investment allocated in the Ten-Year Capital Strategy published in April 2003 will fund an additional portion of the recommended investment. In the same Reconciliation Report, OMB estimated that 37% of the expense maintenance levels recommended were included in the financial plan.

Financing Program The following table sets forth the par amount of bonds issued and expected to be issued during the 2005 through 2009 fiscal years to implement the Four-Year Capital Program. See ‘‘SECTION VIII: INDEBTEDNESS—Indebtedness of the City and Certain Other Entities.’’

2005-2009 FINANCING PROGRAM 2005 2006 2007 2008 2009 Total (In Millions) City General Obligation Bonds...... $3,880 $4,200 $4,660 $4,880 $4,520 $22,140 TSASC(1)...... 49 — — — — 49 Water Authority (2)...... 1,746 1,687 1,675 1,746 1,713 8,567 Conduit Debt ...... 37 — — — — 37 Total ...... $5,712 $5,887 $6,335 $6,626 $6,233 $30,793

Note: Figures exclude refunding bonds and, with respect to the Water Authority, include commercial paper and exclude bonds that defease commercial paper. Totals may not add due to rounding. (1) Reflects TSASC’s final draws against a $150 million loan from the U.S. Department of Transportation pursuant to the Transportation Infrastructure Finance and Innovation Act (‘‘TIFIA’’) the last of which was completed on April 30, 2005. TSASC does not intend to issue any additional bonds under its current indenture. (2) Water Authority includes a total allocation for reserve funds and costs of issuance of $732 million. The City’s financing program includes the issuance of water and sewer revenue bonds by the Water Authority which is authorized to issue bonds to finance capital investment in the City’s water and sewer system. Pursuant to State law, debt service on this indebtedness is secured by water and sewer fees paid by users of the water and sewer system. Such fees are revenues of the Water Board, which holds a lease interest in the City’s water and sewer system. After providing for debt service on obligations of the Water Authority and certain incidental costs, the revenues of the Water Board are paid to the City to cover the City’s costs of operating the water and sewer system and as rental for the system. The City’s Ten-Year Capital Strategy applicable to the City’s water and sewer system covering fiscal years 2006 through 2015, projects City-funded water and sewer investment (which is expected to be financed with proceeds of Water Authority debt) at approximately $15.6 billion. The City’s Capital Commitment Plan for fiscal years 2005 through 2009 reflects total anticipated City-funded water and sewer commitments of $9.8 billion which are expected to be financed with the proceeds of Water Authority debt. Implementation of the financing program is dependent upon the ability of the City and other financing entities to market their securities successfully in the public credit markets which will be subject to prevailing market conditions at the times of sale. No assurance can be given that the credit markets will absorb the projected amounts of public bond sales. A significant portion of bond financing is used to reimburse the City’s General Fund for capital expenditures already incurred. If the City and such other entities are unable to sell such amounts of bonds, it would have an adverse effect on the City’s cash

45 position. In addition, the need of the City to fund future debt service costs from current operations may also limit the City’s capital program. The Ten-Year Capital Strategy for fiscal years 2006 through 2015 totals $62.4 billion, of which approximately 85% is to be financed with funds borrowed by the City and such other entities. See ‘‘SECTION VIII: INDEBTEDNESS —Indebtedness of the City and Certain Other Entities—Limitations on the City’s Authority to Contract Indebtedness.’’ Congressional developments affecting federal taxation generally could reduce the market value of tax-favored investments and increase the debt-service costs of carrying out the currently tax-exempt major portion of the City’s capital plan. For information concerning litigation which, if determined against the City, could have an adverse impact on the amount of debt the City can have outstanding under the general debt limit (defined as 10% of the average full value of taxable real estate in the City for the most recent five years), see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’

In an effort to reduce its borrowing costs over the life of its bonds, the City began entering into interest rate exchange agreements commencing in fiscal year 2003. For a description of such agreements entered into prior to October 25, 2004, see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements— Notes A.14 and E.2.’’

Since October 25, 2004, the City has entered into three interest rate exchange agreements with Bear Stearns Financial Products Inc. (‘‘Bear Stearns’’) with effective dates of March 3, 2005, in connection with the City’s Fiscal 2005 Series K General Obligation Bonds. Pursuant to the first of these agreements, which has a notional amount of $11,980,000, the City pays a fixed rate of 4.55% and receives an amount equal to the interest payable on its Fiscal 2005 Series K General Obligation Bonds maturing in 2015, which bear interest at a variable rate based on changes to the Consumer Price Index plus 1.5%. This agreement will terminate on August 1, 2015. Pursuant to the second of these agreements, which has a notional amount of $14,125,000, the City pays a fixed rate of 4.63% and receives an amount equal to the interest payable on its Fiscal 2005 Series K General Obligation Bonds maturing in 2016, which bear interest at a variable rate based on changes to the Consumer Price Index plus 1.55%. This agreement will terminate on August 1, 2016. Pursuant to the third of these agreements, which has a notional amount of $18,040,000, the City pays a fixed rate of 4.71% and receives an amount equal to the interest payable on its Fiscal 2005 Series K General Obligation Bonds maturing in 2017, which bear interest at a variable rate based on changes to the Consumer Price Index plus 1.6%. This agreement will terminate on August 1, 2017.

As of March 31, 2005, the total marked-to-market value of the City’s interest rate exchange agreements was ($44,145,299).

Seasonal Financing Requirements The City since 1981 has fully satisfied its seasonal financing needs in the public credit markets, repaying all short-term obligations within their fiscal year of issuance. To finance its projected cash flow needs, the City issued $1.5 billion of short-term obligations in fiscal years 2004, 2003 and 2002, and $750 million of short-term obligations in fiscal years 2001 and 2000. The delay in the adoption of the State’s budget in certain past fiscal years has required the City to issue short-term notes in amounts exceeding those expected early in such fiscal years. The City does not expect that it will issue any short-term obligations during fiscal year 2005. The Financial Plan reflects the issuance of $1.5 billion of short-term obligations during fiscal year 2006 to satisfy the City’s seasonal financing needs.

46 SECTION VIII: INDEBTEDNESS

Indebtedness of the City and Certain Other Entities

Outstanding City and PBC Indebtedness The following table sets forth outstanding indebtedness having an initial maturity greater than one year from the date of issuance of the City and the PBCs as of March 31, 2005. (In Thousands) Gross City Long-Term Indebtedness(1) ...... $32,410,210 Less: Assets Held for Debt Service(1) ...... (55,476) Net City Long-Term Indebtedness ...... $32,354,734 PBC Indebtedness(2) Bonds Payable ...... 394,300 Capital Lease Obligations ...... 1,707,167 Gross PBC Indebtedness ...... 2,101,467 Less: Assets Held for Debt Service ...... (112,008) Net PBC Indebtedness ...... 1,989,459 Combined Net City and PBC Indebtedness ...... $34,344,193

(1) With respect to City long-term indebtedness, ‘‘Assets Held for Debt Service’’ consists of General Debt Service Fund assets, and $38.852 million principal amount of City bonds held by MAC. Amounts include general obligation bonds only, and do not include the indebtedness of the TFA and TSASC, which were $13.005 billion (including $2 billion of Recovery Bonds) and $1.284 billion, respectively, as of March 31, 2005.

(2) ‘‘PBC Indebtedness’’ refers to City obligations to PBCs (excluding PBCs which are discretely presented component units in the City’s financial statements). For further information regarding the indebtedness of certain PBCs, see ‘‘Public Benefit Corporation Indebtedness’’ below.

Trend in Outstanding Net City and PBC Indebtedness

The following table shows the trend in the outstanding long-term and short-term debt of the City and in PBC indebtedness as of June 30 of each of the fiscal years 1994 through 2004 and at March 31, 2005.

City(1) PBC Bonds Long-Term Short-Term and Capital Debt(2) Debt Leases(2) Total (In Millions) 1994...... $21,731 $— $1,114 $22,845 1995...... 23,258 — 1,098 24,356 1996...... 25,052 — 1,155 26,207 1997...... 26,180 — 1,182 27,362 1998...... 25,917 — 1,129 27,046 1999...... 26,287 — 1,403 27,690 2000...... 25,543 — 1,575 27,118 2001...... 25,609 — 1,533 27,142 2002...... 27,312 — 1,537 28,849 2003...... 29,043 — 2,059 31,102 2004...... 30,498 — 1,766 32,264 March 31, 2005...... 32,355 — 1,989 34,344

(1) Amounts do not include City bonds held by MAC. See ‘‘Outstanding City and PBC Indebtedness—note 1.’’ Amounts include general obligation bonds only, and do not include indebtedness of the TFA and TSASC, which were $13.005 billion (including $2 billion of Recovery Bonds and Notes) and $1.284 billion, respectively, as of March 31, 2005.

(2) Net of reserves. See ‘‘Outstanding City and PBC Indebtedness.’’ PBCs indebtedness excludes indebtedness of PBCs which are discretely presented component units in the City’s financial statements. For more information concerning Component Unit PBCs, see ‘‘Public Benefit Corporation Indebtedness’’ below.

47 Rapidity of Principal Retirement

The following table details, as of March 31, 2005, the cumulative percentage of total City general obligation debt outstanding that is scheduled to be retired in accordance with its terms in each prospective five-year period.

Cumulative Percentage of Period Debt Scheduled for Retirement 5 years 20.33% 10 years 45.46 15 years 67.62 20 years 86.26 25 years 95.89 30 years 99.78

City and PBC Debt Service Requirements

The following table summarizes future debt service requirements, as of March 31, 2005, on City term and serial bonds outstanding and City obligations to certain PBCs.

City Long-Term Debt PBC Bonds Principal and Capital Fiscal Years of Bonds(1) Interest(1) Leases(2) Total (In Thousands) 2005 ...... $ 59,315 $ 202,777 $ 63,705 $ 325,797 2006 ...... 1,406,496 1,225,383 99,000 2,730,879 2007 ...... 1,698,595 1,224,486 101,084 3,024,165 2008 ...... 1,665,318 1,165,056 106,060 2,936,434 2009 through 2147 ...... 27,525,010 9,934,207 1,619,610 39,078,827 Total ...... $32,354,734 $13,751,909 $1,989,459 $48,096,102

(1) Includes debt service on general obligation bonds only.

(2) City obligations to certain PBCs exclude PBCs which are discretely presented component units included in the City’s financial statements. For additional information concerning these PBCs, see ‘‘Public Benefit Corporation Indebtedness’’ below.

Certain Debt Ratios

The following table sets forth information for each of the fiscal years 1995 through 2004, with respect to the approximate ratio of debt to certain economic factors. As used in this table, debt includes net City general obligation bond and capital lease debt, MAC, TFA and TSASC debt and PBC indebtedness.

48 Debt as % of Total Taxable Real Debt Property By Per Assessed EstimatedFull Fiscal Year Capita Valuation Valuation(1) 1995...... $4,118 40.6% 4.5% 1996...... 4,290 42.3 7.7 1997...... 4,344 43.1 8.9 1998...... 4,510 44.5 9.8 1999...... 4,791 45.8 11.4 2000...... 4,967 46.0 11.6 2001 ...... 5,048 44.7 11.2 2002...... 5,318 43.9 10.5 2003...... 5,877 46.2 11.0 2004...... 6,223 47.1 9.6

Source: CAFR for the fiscal year ended June 30, 2004. (1) Based on full valuations for each fiscal year derived from the application of the special equalization ratio reported by the State Board for such fiscal year.

Ratio of Debt to Personal Income The following table sets forth, for each of fiscal years 1995 through 2002, debt per capita as a percentage of personal income per capita in current dollars. As used in this table, debt includes net City general obligation bond and capital lease debt, MAC, TFA and TSASC debt and PBC indebtedness.

Debt Debt per Capita per Personal Income as % of Personal Fiscal Year Capita per Capita(1) Income per Capita 1995...... 4,118 $28,981 14.21% 1996...... 4,290 30,407 14.11 1997...... 4,344 31,590 13.75 1998...... 4,510 33,341 13.53 1999 ...... 4,791 34,658 13.82 2000...... 4,967 36,916 13.45 2001...... 5,048 37,631 13.42 2002...... 5,318 37,476 14.19

Source: CAFR for the fiscal year ended June 30, 2003. (1) Personal income is measured before the deduction of personal income taxes and other personal taxes.

Certain Provisions for the Payment of City Indebtedness The State Constitution requires the City to make an annual appropriation for: (i) payment of interest on all City indebtedness; (ii) redemption or amortization of bonds; (iii) redemption of other City indebtedness (except bond anticipation notes (‘‘BANs’’), tax anticipation notes (‘‘TANs’’), revenue anticipation notes (‘‘RANs’’) and urban renewal notes (‘‘URNs’’) contracted to be paid in that year out of the tax levy or other revenues); and (iv) redemption of short-term indebtedness issued in anticipation of the collection of taxes or other revenues, such as TANs, RANs and URNs, and renewals of such short-term indebtedness which are not retired within five years of the date of original issue. If this appropriation is not made, a sum sufficient for such purposes must be set apart from the first revenues thereafter received by the City and must be applied for these purposes. The City’s debt service appropriation provides for the interest on, but not the principal of, short-term indebtedness, which has in recent years been issued as TANs and RANs. If such principal were not provided for from the anticipated sources, it would be, like debt service on City bonds, a general obligation of the City.

49 Pursuant to the Financial Emergency Act, a general debt service fund (the ‘‘General Debt Service Fund’’ or the ‘‘Fund’’) has been established for the purpose of paying Monthly Debt Service, as defined in the Act. In addition, as required under the Act, a TAN Account has been established by the State Comptroller within the Fund to pay the principal of outstanding City TANs. After notification by the City of the date when principal due or to become due on an outstanding issue of TANs will equal 90% of the ‘‘available tax levy,’’ as defined in the Act, with respect to such issue, the State Comptroller must pay into the TAN Account from the collection of real estate tax payments (after paying amounts required to be deposited in the General Debt Service Fund for Monthly Debt Service) amounts sufficient to pay the principal of such TANs. Similarly, a RAN Account has been established by the State Comptroller within the Fund to pay the principal of outstanding City RANs. Revenues in anticipation of which RANs are issued must be deposited in the RAN Account. If revenue consists of State or other revenue to be paid to the City by the State Comptroller, the State Comptroller must deposit such revenue directly into the RAN Account on the date such revenue is payable to the City. Under the Act, after notification by the City of the date when principal due or to become due on an outstanding issue of RANs will equal 90% of the total amount of revenue against which such RANs were issued on or before the fifth day prior to the maturity date of the RANs, the State Comptroller must commence on such date to retain in the RAN Account an amount sufficient to pay the principal of such RANs when due. Revenues required to be deposited in the RAN Account vest immediately in the State Comptroller in trust for the benefit of the holders of notes issued in anticipation of such revenues. No person other than a holder of such RANs, has any right to or claim against revenues so held in trust. Whenever the amount contained in the RAN Account or the TAN Account exceeds the amount required to be retained in such Account, the excess, including earnings on investments, is to be withdrawn from such Account and paid into the General Fund of the City. Limitations on the City’s Authority to Contract Indebtedness The Financial Emergency Act imposes various limitations on the issuance of City indebtedness. No TANs may be issued by the City which would cause the principal amount of such issue of TANs to exceed 90% of the ‘‘available tax levy,’’ as defined in the Act, with respect to such issue; TANs and renewals thereof must mature not later than the last day of the fiscal year in which they were issued. No RANs may be issued by the City which would cause the principal amount of RANs outstanding to exceed 90% of the ‘‘available revenues,’’ as defined in the Act, for that fiscal year; RANs must mature not later than the last day of the fiscal year in which they were issued; and in no event may renewals of RANs mature later than one year subsequent to the last day of the fiscal year in which such RANs were originally issued. No BANs may be issued by the City in any fiscal year which would cause the principal amount of BANs outstanding, together with interest due or to become due thereon, to exceed 50% of the principal amount of bonds issued by the City in the twelve months immediately preceding the month in which such BANs are to be issued; BANs must mature not later than six months after their date of issuance and may be renewed once for a period not to exceed six months. Budget Notes may be issued only to fund cost overruns in the expense budget; no Budget Notes, or renewals thereof, may mature later than sixty days prior to the last day of the fiscal year next succeeding the fiscal year during which the Budget Notes were originally issued. The State Constitution provides that, with certain exceptions, the City may not contract indebted- ness, including contracts for capital projects to be paid with the proceeds of City bonds (‘‘contracts for capital projects’’), in an amount greater than 10% of the average full value of taxable real estate in the City for the most recent five years (the ‘‘general debt limit’’). See ‘‘SECTION IV: SOURCES OF CITY REVENUES—Real Estate Tax—Assessment.’’ For information concerning litigation which, if determined against the City, could have an adverse impact on the amount of debt the City can have outstanding under the general debt limit, see ‘‘SECTION IX: OTHER INFORMATION—Litigation—Taxes.’’ Certain indebted- ness (‘‘excluded debt’’) is excluded in ascertaining the City’s authority to contract indebtedness within the constitutional limit. TANs, RANs, BANs, URNs and Budget Notes and long-term indebtedness issued for certain types of public improvements and capital projects are considered excluded debt. The City’s authority for variable rate bonds is currently limited, with statutory exceptions, to 25% of the general debt limit. The State Constitution also provides that, subject to legislative implementation, the City may contract indebtedness for low-rent housing, nursing homes for persons of low income and urban renewal purposes in an amount not to exceed 2% of the average assessed valuation of the taxable real estate of

50 the City for the most recent five years (the ‘‘2% debt limit’’). Excluded from the 2% debt limit, after approval by the State Comptroller, is indebtedness for certain self-supporting programs aided by City guarantees or loans. Neither Water Authority, TFA or TSASC indebtedness nor the City’s commitments with other PBCs (other than certain guaranteed debt of the Housing Authority) is chargeable against the City’s constitutional debt limits. The TFA and TSASC were created to provide financing for the City’s capital program. Debt of the TFA and TSASC is not subject to the general debt limit of the City. TFA bonds are secured by the City’s personal income tax revenues, and sales tax revenues if personal income tax revenues do not satisfy specified debt ratios. TSASC has issued approximately $1.3 billion of bonds which are payable from TSRs. Without the TFA and TSASC, or other legislative relief, new contractual commitments for the City’s general obligation financed capital program would have been virtually brought to a halt during the Financial Plan period beginning early in the 1998 fiscal year. The TFA has issued its statutory maximum of $11.5 billion of bonds and notes for City capital purposes. The TFA is also authorized to have outstanding $2.5 billion of bonds and notes (‘‘Recovery Bonds’’) to pay Recovery Costs of which approximately $2 billion is outstanding. The City used $1.5 billion of proceeds of Recovery Bonds in fiscal year 2003 to compensate for revenue losses that are Recovery Costs. The City may seek legislation authorizing the TFA to issue additional bonds for capital purposes. TSASC does not intend to issue any additional bonds under its current indenture. The City’s current projections indicate that it has sufficient financing capacity to complete its Ten-Year Capital Strategy. The following table sets forth the calculation of the debt-incurring power of the City as of April 30, 2005. (In Thousands) Total City Debt-Incurring Power under General Debt Limit .... $43,115,213 Gross Debt-Funded ...... $32,730,277 Less: Excluded Debt ...... (484,577) 32,245,700 Less: Fiscal Year 2005 Appropriations for Principal of Debt . . . (63,180) 32,182,519 Contracts and Other Liabilities, Net of Prior TSASC and TFA Financings and Restricted Cash ...... 6,456,271 Total Indebtedness ...... 38,638,791 City Debt-Incurring Power(1) ...... $ 4,476,422

Note: Numbers may not add due to rounding. (1) Without the creation of the TFA and TSASC, the debt-incurring capacity of the City under the general debt limit, as of April 30, 2005, would have been exceeded by $8.1 billion.

Federal Bankruptcy Code Under the Federal Bankruptcy Code, a petition may be filed in the federal bankruptcy court by a municipality which is insolvent or unable to meet its debts as they mature. The filing of such a petition would operate as a stay of any proceeding to enforce a claim against the City. The Federal Bankruptcy Code requires the municipality to file a plan for the adjustment of its debts, which may modify or alter the rights of creditors and may provide for the municipality to issue indebtedness, which could have priority over existing creditors and which could be secured. Any plan of adjustment confirmed by the court must be approved by the requisite majority of creditors. If confirmed by the bankruptcy court, the plan would be binding upon all creditors affected by it. Each of the City and the Control Board, acting on behalf of the City, has the legal capacity to file a petition under the Federal Bankruptcy Code.

Public Benefit Corporation Indebtedness

City Financial Commitments to PBCs PBCs are corporate governmental agencies created by State law to finance and operate projects of a governmental nature or to provide governmental services. Generally, PBCs issue bonds and notes to

51 finance construction of housing, hospitals, dormitories and other facilities and receive revenues from the collection of fees, charges or rentals for the use of their facilities, including subsidies and other payments from the governmental entity whose residents have benefited from the services and facilities provided by the PBC. These bonds and notes do not constitute debt of the City unless expressly guaranteed or assumed by the City. The City has undertaken various types of financial commitments with certain PBCs which, although they generally do not represent City indebtedness, have a similar budgetary effect. During a Control Period as defined by the Financial Emergency Act, neither the City nor any Covered Organization may enter into any arrangement whereby the revenues or credit of the City are directly or indirectly pledged, encumbered, committed or promised for the payment of obligations of a PBC unless approved by the Control Board. The principal forms of the City’s financial commitments with respect to PBC debt obligations are as follows: 1. Capital Lease Obligations—These are leases of facilities by the City or a Covered Organiza- tion, entered into with PBCs, under which the City has no liability beyond monies legally available for lease payments. State law generally provides, however, that in the event the City fails to make any required lease payment, the amount of such payment will be deducted from State aid otherwise payable to the City and will be paid to the PBC. 2. Executed Leases—These are leases pursuant to which the City is legally obligated to make the required rental payments. 3. Capital Reserve Fund Arrangements—Under these arrangements, State law requires the PBC to maintain a capital reserve fund in a specified minimum amount to be used solely for the payment of the PBC’s obligations. State law further provides that in the event the capital reserve fund is depleted, State aid otherwise payable to the City may be paid to the PBC to restore such fund. The City’s financial statements include MAC and certain PBCs, such as The New York City Educational Construction Fund (‘‘ECF’’) and the CUCF.

New York City Educational Construction Fund As of March 31, 2005, $99.14 million principal amount of ECF bonds to finance costs related to the school portions of combined occupancy structures was outstanding. Under ECF’s leases with the City, debt service on the ECF bonds is payable by the City to the extent third party revenues are not sufficient to pay such debt service.

New York State Housing Finance Agency As of March 31, 2005, $126.3 million principal amount of New York State Housing Finance Agency (‘‘HFA’’) refunding bonds relating to hospital and family care facilities leased to the City was outstanding. HFA does not receive third party revenues to offset the City’s capital lease obligations with respect to these bonds. Lease payments, which are made by the City seven months in advance of payment dates of the bonds, are intended to cover development and construction costs, including debt service, of each facility plus a share of HFA’s overhead and administrative expenses.

Dormitory Authority of the State of New York As of March 31, 2005, $640.0 million principal amount and $866.9 million principal amount of DASNY bonds issued to finance the design, construction and renovation of court facilities and health facilities, respectively, in the City were outstanding. The court facilities and health facilities are leased to the City by DASNY, with lease payments made by the City in amounts sufficient to pay debt service on DASNY bonds and certain fees and expenses of DASNY.

City University Construction Fund As of March 31, 2005, approximately $560.7 million principal amount of DASNY bonds, relating to Community College facilities, subject to capital lease arrangements was outstanding. The City and the

52 State are each responsible for approximately one-half of the CUCF’s annual rental payments to DASNY for Community College facilities which are applied to the payment of debt service on the DASNY’s bonds issued to finance the leased projects plus related overhead and administrative expenses of the DASNY.

New York State Urban Development Corporation As of March 31, 2005, $42.7 million principal amount of New York State Urban Development Corporation (‘‘UDC’’) bonds subject to executed or proposed lease arrangements was outstanding. The City leases schools and certain other facilities from UDC.

SECTION IX: OTHER INFORMATION

Pension Systems The City maintains a number of pension systems providing benefits for its employees and employees of various independent agencies (including certain Covered Organizations). The systems combine features of a defined benefit pension plan with those of a defined contribution pension plan. Membership in the City’s five major actuarial systems on June 30, 2004 consisted of approximately 348,000 current employees, of whom approximately 83,000 were employees of certain independent agencies whose pension costs in some cases are provided by City appropriations. In addition, there were approximately 270,000 retirees and beneficiaries currently receiving benefits and other vested members terminated but not receiving benefits. The City also contributes to three other actuarial systems, maintains a non- actuarial retirement system for retired individuals not covered by the five major actuarial systems, provides other supplemental benefits to retirees and makes contributions to certain union annuity funds. Each of the City’s five major actuarial pension systems is managed by a board of trustees which includes representatives of the City and the employees covered by such system. The City Comptroller is the custodian of, and has been delegated investment responsibilities for, the major actuarial systems, subject to the policies established by the boards of trustees of the systems and State law. For fiscal year 2004, the City’s pension contributions for the five major actuarial pension systems, made on a statutory basis based on actuarial valuations performed as of June 30, 2003, plus the other pension expenditures were approximately $2.444 billion. Expense projections for fiscal years 2005 through 2009 are estimated at $3.387 billion, $4.762 billion, $5.018 billion, $4.911 billion and $4.783 billion, respectively, and, for fiscal years 2006 through 2009, are based on proposed actuarial valuation estimates and reflect revised funding assumptions that principally follow the recommendations of an independent audit. These projections incorporate the additional costs of significant benefit enhancements enacted in 2000, including automatic cost of living adjustments (‘‘COLA’’) for eligible retirees and beneficiaries which are being funded over a ten-year period. The projections also incorporate the impact of actual pension fund investment performance since 2000 which include significant losses in fiscal years 2001 through 2003, respectively, followed by investment gains in 2004. The assumed rate of return on pension investments is eight percent as governed by State law. The costs or incremental benefit of the return on pension investments in any given year is phased in over the subsequent five-year period. Certain of the systems provide pension benefits of 50% to 55% of ‘‘final pay’’ after 20 to 25 years of service with additional benefits for subsequent years of service. For the 2004 fiscal year, the City’s total annual pension costs, including the City’s pension costs not associated with the five major actuarial systems, plus Federal Social Security tax payments by the City for the year, were approximately 22% of total payroll costs. In addition, contributions are also made by certain component units of the City and other government units directly to the three cost sharing multiple employer actuarial systems. The State Constitution provides that pension rights of public employees are contractual and shall not be diminished or impaired. Annual pension costs are computed in accordance with Governmental Accounting Standards Board Statement Number 27 and are consistent with generally accepted actuarial principles. Actual pension contributions are less than annual pension costs, primarily because (i) the City is only one of the participating employers in the New York City Employees’ Retirement System (‘‘NYCERS’’), the

53 Teachers’ Retirement System of The City of New York (the ‘‘Teachers System’’) and the New York City Board of Education Retirement System (the ‘‘BOE System’’) and (ii) Chapter 125 of the Laws of 2000 (‘‘Chapter 125’’), which provides eligible retirees and eligible beneficiaries with increases in supplemen- tation as of September 2000 and with automatic COLA benefits beginning September 2001, also provides for a phase-in schedule, subsequently extended from five to ten years by Chapter 278 of the Laws of 2002, for funding the additional liabilities created by the benefits provided by Chapter 125. For the New York City Police Pension Fund, Subchapter Two (the ‘‘Police Fund’’) and the New York City Fire Department Pension Fund, Subchapter Two, Net Pension Obligations, which reflect the current funding assumptions which commenced in fiscal year 2000, of approximately $506.4 million and approximately $201.6 million, respectively, were recorded as of June 30, 2004. The following table sets forth, for the five major actuarial pension systems, the amounts by which the actuarial accrued liabilities exceeded the actuarial values of assets for June 30, 1995 to June 30, 2003. For those retirement systems where the actuarial asset values exceeded the actuarial accrued liabilities (i.e., NYCERS for June 30, 1995 to 1999, the Teachers System for June 30, 1999 only, and the BOE System and the Police Fund for June 30, 1999, 2000, 2001, 2002, 2003, and 2004) the amounts shown include zero for these retirement systems. Unfunded Pension Liability June 30 Amount(1) (In Billions) 1995...... $4.03 1996...... 4.29 1997...... 4.28 1998...... 4.64 1999...... 15 2000 ...... 17 2001...... 21 2002...... 19 2003...... 33 2004...... 27

(1) For purposes of making these calculations, accrued pension contributions receivable from the City were not treated as assets of the system.

For further information regarding the City’s pension systems see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note E.5.’’ Litigation The following paragraphs describe certain material legal proceedings and claims involving the City and Covered Organizations other than routine litigation incidental to the performance of their governmental and other functions and certain other litigation arising out of alleged constitutional violations, torts, breaches of contract and other violations of law and condemnation proceedings. While the ultimate outcome and fiscal impact, if any, on the City of the proceedings and claims described below are not currently predictable, adverse determinations in certain of them might have a material adverse effect upon the City’s ability to carry out the Financial Plan. The City has estimated that its potential future liability on account of outstanding claims against it as of June 30, 2004 amounted to approximately $4.4 billion. See ‘‘SECTION VII: FINANCIAL PLAN—Assumptions—Expenditure Assumptions—2. Other Than Personal Services Costs—Judgments and Claims.’’ Taxes 1. Numerous real estate tax certiorari proceedings alleging overvaluation, inequality and illegality are pending against the City. Based on historical settlement activity, and including an estimated premium for inequality of assessment, the City estimates its potential future liability for outstanding certiorari proceedings to be $634 million at June 30, 2004. For a discussion of the City’s accounting treatment of its inequality and overvaluation exposure, see ‘‘APPENDIX B—FINANCIAL STATEMENTS—Notes to Financial Statements—Note D.5.’’

54 2. The City has brought proceedings challenging the final class ratios for class two and class four property certified by the State Board for the 1991 and 1992 assessment rolls. Class ratios are used in real estate tax certiorari proceedings involving allegations of inequality of assessment and ratios that are too low can result in more successful claims for refunds for overpayments than appropriate. In a proceeding consolidating the City’s challenges to the class ratios for the 1991 and 1992 assessment rolls, on December 15, 1994, the Supreme Court, New York County annulled the class two and class four ratios for those years and remanded the matter to the State Board for recalculation of the ratios consistent with the decision. Pursuant to a stipulation extending its time to appeal, the State Board has not yet appealed the judgment, but if the original class ratios were reinstated on appeal, it could lead to an increase in refunds for overpayment of real estate taxes paid in the 1992 and 1993 fiscal years. The State Board and the City have also agreed to toll the City’s time to challenge final class ratios for classes two and four for the 1993 and 1994 assessment rolls, pending the outcome of efforts to resolve the matter without further litigation. For additional information, see ‘‘SECTION IV: SOURCES OF CITY REVENUES—Real Estate Tax— Assessment.’’

3. A group of real estate taxpayers has brought a series of declaratory judgment actions charging that Tax Resolutions adopted by the City Council violate the State Constitution. Plaintiffs allege that the special equalization ratios calculated by the State Board resulted in the overstatement of the average full valuation of real property in the City with the result that the City’s real estate tax levy is in excess of the State Constitution’s real estate tax limit. Actions relating to the real estate tax levies for fiscal years 1993, 1994, 1995 and 1996 have been commenced by groups of taxpayers and are pending in State Supreme Court, Albany County. The first such action was dismissed on standing grounds. Although plaintiffs do not specify the extent of the alleged real property overvaluation, an adverse determination significantly reducing such limit could subject the City to substantial liability for real property tax refunds and could have an adverse impact on the amount of debt the City can have outstanding under the general debt limit (defined as 10% of the average full value of taxable real estate in the City for the most recent five years).

Miscellaneous

1. In an action pending in State court, plaintiffs seek broad injunctive relief directed toward the City’s lead paint poisoning prevention activities. In that action, a class has been certified consisting of children under the age of seven living in multiple dwellings in New York City where a complaint of lead paint has been made which the City allegedly has not timely and adequately inspected and abated. Orders were issued in this action directing the City’s Department of Housing Preservation and Development and Department of Health to issue regulations in conformance with the court’s interpretation of Local Law 1 of 1982 governing the removal of lead paint in residential buildings. While both agencies were in the process of promulgating these regulations, the parties to the litigation agreed to a stay of the relevant orders in contemplation of legislative change. In the summer of 1999, the City Council passed and the Mayor signed a new local law governing lead paint in residential buildings and repealed Local Law 1 of 1982. A lawsuit was filed against the City challenging the new local law as having been passed in violation of State and City environmental laws. On July 1, 2003, the New York Court of Appeals ruled that Local Law 38 was null and void because the City Council had failed to conduct a proper environmental assessment. The decision revived Local Law 1, but the Court essentially urged the parties to agree to an appropriate stay of enforcement of certain provisions of Local Law 1 as well as court orders interpreting those provisions (as the parties had in the past) while the City pursued appropriate legislative remedies. On February 4, 2004, the City Council overrode a Mayoral veto and enacted new legislation governing lead paint in residential buildings. This legislation also repealed Local Law 1 of 1982. The legislation became effective six months after enactment. However, on April 9, 2004, two lawsuits were filed that alleged that the new legislation was null and void based on the City Council’s purported failure to conduct a proper environmental assessment; one of the lawsuits also has additional claims that challenge certain provisions which create a presumption that lead paint exists in a multiple dwelling built before 1960 where a child under the age of six resides. In early February 2005, the Appellate Division, First Department, affirmed the trial court’s dismissal of the lawsuits on the grounds that plaintiffs in both cases did not have standing. On April 28, 2005, plaintiffs’ motion to the New York Court of Appeals for leave to appeal was

55 denied. The State class action also challenges the City’s activities relating to the screening of children for lead poisoning, the timeliness and adequacy of enforcement efforts, and inspection of day care facilities. 2. In March 2005, the UFT, the union that represents the teachers in the New York City public school system, commenced an action and an Article 78 proceeding in New York Supreme Court, New York County, against the Teachers Retirement System and the City alleging that, due to certain miscalculations relating, inter alia, to the interest earned on member contributions to a retirement plan known as the 20 Year Pension Plan, teachers who retired under this plan do not receive the entire amount of retirement benefits to which they are entitled. Plaintiffs seek declaratory relief and an award to 20 Year Pension Plan members of not less than $800 million to equal the difference between what plaintiffs allege they are entitled to under the 20 Year Pension Plan and the amount actually received. If plaintiffs were to prevail in this matter, it could result in substantial costs to the City. 3. In February 1997, a former New York City school principal filed an action in New York State Supreme Court challenging the investment policies and practices of the Retirement Board of the Teachers’ Retirement System of The City of New York (the ‘‘System’’) with regard to a component of the System consisting of member contributions and earnings thereon known as the Variable B Fund. Plaintiff alleges that the trustees of the System illegally maintained the Variable B Fund as a fixed-income fund and ignored a requirement that a substantial amount of the Variable B Fund’s assets be invested in equity securities. The defendants are the System and its individual trustees. Plaintiff seeks damages on behalf of all Variable B Fund participants in excess of $2 billion. In May 1999, the Appellate Division, First Department, affirmed the Supreme Court’s earlier denial of the defendants’ motion for summary judgment. The discovery previously directed by the Appellate Division has now been completed. On November 19, 2003, the defendants moved for summary judgment. On May 2, 2005, the Supreme Court denied defendants’ motion and ordered the matter to trial. If the plaintiff were to prevail in this action, it could result in substantial costs to the City. 4. There are currently 153 plaintiffs alleging respiratory or other injuries from alleged toxic exposures to World Trade Center dust and debris. The actions, which seek approximately $500 million in damages, were either commenced in or have been removed to federal court pursuant to the Air Transportation and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) (the ‘‘Air Transportation Act’’), which grants exclusive federal jurisdiction for all claims related to or resulting from the September 11 attack. These consist of Department of Sanitation employees, firefighters, police officers and construction workers allegedly injured either at the World Trade Center site or the Fresh Kills landfill. On March 10, 2004, the Southern District dismissed a case filed on behalf of 12 firefighters alleging wrongful death. Plaintiffs appealed this decision, and on April 29, 2005 the Second Circuit Court of Appeals upheld the District Court decision dismissing the action. On June 20, 2003, the Southern District ordered that actions alleging injuries resulting from exposure to World Trade Center debris on or before September 29, 2001 would remain in federal court, while those alleging injuries based on exposure after that date would be remanded to state court. It is unclear what effect the decision will have on cases arising from the September 11 attack and on the application of the Air Transportation Act’s limitation on the City’s liability for actions arising from the September 11 attack. The City has appealed this decision. The City has formed a not-for-profit ‘‘captive’’ insurance company, WTC Captive Insurance Company, Inc. (the ‘‘WTC Insurance Company’’) to cover claims against the City and its private contractors relating to debris removal work at the World Trade Center site and the Fresh Kills landfill. The insurance company has been funded by a grant from the Federal Emergency Management Agency in the amount of $999,900,000. Most of the claims set forth above that arise from such debris removal are expected to be eligible for coverage by the WTC Insurance Company. No assurance can be given that such insurance will be sufficient to cover all liability that might arise from such claims. One property damage claim relating to the September 11 attack alleges significant damages. The claim, which relates to 7 World Trade Center (‘‘7 WTC’’), alleges damages to Con Edison and its insurers, which claim $314 million for the loss of the electrical substation over which 7 WTC was built. The claim alleges that a diesel fuel tank, which stored fuel for emergency back-up power to the City’s Office of Emergency Management facility on the 23rd floor, contributed to the building’s collapse. Con Edison and its insurers filed suit based on the allegations in their claim. Defendant’s motion to dismiss was denied by the Court with leave to renew at a later date.

56 5. One hundred ninety-one notices of claim have been filed and 177 actions in federal court commenced against the City in connection with the Staten Island Ferry accident on October 15, 2003. The notices and actions seek damages exceeding $3 billion for various claims including personal injury, wrongful death and emotional distress. On December 1, 2003 the City filed a limitation complaint in federal court pursuant to federal maritime law seeking to limit its potential liability to approximately $14 million, the value of the ferry involved in the accident.

Tax Exemption

In the opinion of Sidley Austin Brown & Wood LLP, New York, New York, as Bond Counsel, except as provided in the following sentence, interest on the Tax-Exempt Bonds will not be includable in the gross income of the owners of the Tax-Exempt Bonds for purposes of federal income taxation under existing law. Interest on the Tax-Exempt Bonds will be includable in the gross income of the owners thereof retroactive to the date of issue of the Tax-Exempt Bonds in the event of a failure by the City to comply with applicable requirements of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), and covenants regarding use, expenditure and investment of bond proceeds and the timely payment of certain investment earnings to the United States Treasury; and no opinion is rendered by Sidley Austin Brown & Wood LLP as to the exclusion from gross income of the interest on the Tax-Exempt Bonds for federal income tax purposes on or after the date on which any action is taken under the Bond proceedings upon the approval of counsel other than such firm. Interest on the Bonds will be exempt from personal income taxes imposed by the State or any political subdivision thereof, including the City. Interest on the Tax-Exempt Bonds will not be a specific preference item for purposes of the federal individual or corporate alternative minimum tax. The Code contains other provisions that could result in tax consequences, upon which Sidley Austin Brown & Wood LLP renders no opinion, as a result of ownership of such Tax-Exempt Bonds or the inclusion in certain computations (including, without limitation, those related to the corporate alternative minimum tax) of interest that is excluded from gross income. Interest on the Tax-Exempt Bonds owned by a corporation will be included in the calculation of the corporation’s federal alternative minimum tax liability. Ownership of tax-exempt obligations may result in collateral tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S Corporations with excess passive income, individual recipients of Social Security or railroad retirement benefits, taxpayers eligible for the earned income tax credit and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Tax-Exempt Bonds should consult their tax advisors as to the applicability of any such collateral consequences. The excess, if any, of the amount payable at maturity of any maturity of the Tax-Exempt Bonds purchased as part of the initial public offering over the issue price thereof constitutes original issue discount. The amount of original issue discount that has accrued and is properly allocable to an owner of any maturity of the Tax-Exempt Bonds with original issue discount (a ‘‘Discount Bond’’) will be excluded from gross income for federal, State and City income tax purposes to the same extent as interest on the Tax-Exempt Bonds. In general, the issue price of a maturity of the Tax-Exempt Bonds is the first price at which a substantial amount of Tax-Exempt Bonds of that maturity was sold (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers) and the amount of original issue discount accrues in accordance with a constant yield method based on the compounding of interest. A purchaser’s adjusted basis in a Discount Bond is to be increased by the amount of such accruing discount for purposes of determining taxable gain or loss on the sale or other disposition of such Discount Bond for federal income tax purposes. A portion of the original issue discount that accrues in each year to an owner of a Discount Bond which is a corporation will be included in the calculation of the corporation’s federal alternative minimum tax liability. In addition, original issue discount that accrues in each year to an owner of a Discount Bond is included in the calculation of the distribution requirements of certain regulated investment companies and may result in some of the collateral federal income tax consequences discussed above. Consequently, owners of any

57 Discount Bond should be aware that the accrual of original issue discount in each year may result in an alternative minimum tax liability, additional distribution requirements or other collateral federal income tax consequences although the owner of such Discount Bond has not received cash attributable to such original issue discount in such year. The accrual of original issue discount and its effect on the redemption, sale or other disposition of a Discount Bond that is not purchased in the initial offering at the first price at which a substantial amount of such substantially identical Bonds is sold to the public may be determined according to rules that differ from those described above. An owner of a Discount Bond should consult his tax advisors with respect to the determination for federal income tax purposes of the amount of original issue discount with respect to such Discount Bond and with respect to state and local tax consequences of owning and disposing of such Discount Bond. The excess, if any, of the tax basis of the Tax-Exempt Bonds purchased as part of the initial public offering to a purchaser (other than a purchaser who holds such Tax-Exempt Bonds as inventory, stock in trade or for sale to customers in the ordinary course of business) over the amount payable at maturity is ‘‘bond premium.’’ Bond premium is amortized over the term of such Tax-Exempt Bonds for federal income tax purposes (or, in the case of a bond with bond premium callable prior to its stated maturity, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such bond). Owners of such Tax-Exempt Bonds are required to decrease their adjusted basis in such Tax-Exempt Bonds by the amount of amortizable bond premium attributable to each taxable year such Tax-Exempt Bonds are held. The amortizable bond premium on such Tax-Exempt Bonds attributable to a taxable year is not deductible for federal income tax purposes; however, bond premium is treated as an offset to qualified stated interest received on such Tax-Exempt Bonds. Owners of such Tax-Exempt Bonds should consult their tax advisors with respect to the determination for federal income tax purposes of the treatment of bond premiums upon sale or other disposition of such Tax-Exempt Bonds and with respect to the state and local tax consequences of owning and disposing of such Tax-Exempt Bonds. Legislation affecting municipal securities is constantly being considered by the United States Congress. There can be no assurance that legislation enacted after the date of issuance of the Tax-Exempt Bonds will not have an adverse effect on the tax-exempt status of the Tax-Exempt Bonds. Legislative or regulatory actions and proposals may also affect the economic value of the tax exemption or the market price of the Tax-Exempt Bonds. Taxable Bonds The following paragraph addresses certain federal income tax consequences to United States holders of the Taxable Bonds. It does not discuss all the tax consequences that may be relevant to particular holders. Each holder should consult his own tax adviser with respect to his particular circumstances. Interest on the Taxable Bonds will be includable in the gross income of the owners thereof for purposes of federal income taxation. Interest on the Taxable Bonds will be exempt from personal income taxes imposed by the State or any political subdivision thereof, including the City. Ratings The Bonds have been rated ‘‘A1’’ by Moody’s Investors Service (‘‘Moody’s’’), ‘‘A+’’ by Standard & Poor’s Ratings Services (‘‘Standard & Poor’s’’) and ‘‘A+’’ by Fitch, Inc. (‘‘Fitch’’), respectively. The ratings on the Insured Bonds will be based on the insurance policies to be issued by FSA, Ambac Assurance and MBIA. The City expects the Insured Bonds to be rated ‘‘Aaa’’, ‘‘AAA’’, and ‘‘AAA’’ by Moody’s, Standard & Poor’s and Fitch, respectively. Such ratings reflect only the views of Moody’s, Standard & Poor’s and Fitch from which an explanation of the significance of such ratings may be obtained. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely. Any such downward revision or withdrawal could have an adverse effect on the market prices of such bonds. Legal Opinions The legality of the authorization and issuance of the Bonds will be covered by the approving legal opinion of Sidley Austin Brown & Wood LLP, New York, New York, Bond Counsel to the City. Reference

58 should be made to the form of such opinion set forth in Appendix F hereto for the matters covered by such opinion and the scope of Bond Counsel’s engagement in relation to the issuance of the Bonds. Such firm is also acting as counsel for and against the City in certain other unrelated matters. Certain legal matters will be passed upon for the City by its Corporation Counsel.

Willkie Farr & Gallagher LLP, New York, New York, Special Counsel to the City, will pass upon certain legal matters in connection with the preparation of this Official Statement. A description of those matters and the nature of the review conducted by that firm is set forth in its opinion and accompanying memorandum which are on file at the office of the Corporation Counsel.

Certain legal matters will be passed upon by Clifford Chance US LLP, New York, New York, counsel for the Underwriters. Such firm is also acting as counsel for and against the City in certain unrelated matters.

Verification The accuracy of (i) the mathematical computations of the adequacy of the maturing principal of and interest earned on the government obligations to be held in escrow to provide for the payment of the principal of and interest and redemption premiums, if any, on the bonds identified in Appendix C hereof and (ii) certain mathematical computations supporting the conclusion that the Bonds are not ‘‘arbitrage bonds’’ under the Code, will be verified by a firm of independent certified public accountants.

Underwriting The Tax-Exempt Bonds are being purchased for reoffering by the Underwriters for whom Bear, Stearns & Co. Inc., Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and UBS Financial Services Inc. are acting as lead managers. The compensation for services rendered in connection with the underwriting of the Tax-Exempt Bonds shall be $4,897,660.21. The Series O Taxable Bonds will be purchased for reoffering by Bear, Stearns & Co. Inc. The compensation for services rendered in connection with the Series O Taxable Bonds shall be $24,300.00. The Series Q Taxable Bonds will be purchased for reoffering by Citigroup Global Markets Inc. The compensation for services rendered in connection with the Series Q Taxable Bonds shall be $37,006.88. All of the Bonds will be purchased if any are purchased.

Continuing Disclosure Undertaking As authorized by the Act, and to the extent that (i) Rule 15c2-12 (the ‘‘Rule’’) of the Securities and Exchange Commission (‘‘SEC’’) under the Securities Exchange Act of 1934, as amended (the ‘‘1934 Act’’) requires the underwriters (as defined in the Rule) of securities offered hereby (under this caption, if subject to the Rule, the ‘‘securities’’) to determine, as a condition to purchasing the securities, that the City will covenant to the effect of the Undertaking, and (ii) the Rule as so applied is authorized by a federal law that as so construed is within the powers of Congress, the City agrees with the record and beneficial owners from time to time of the outstanding securities (under this caption, if subject to the Rule, ‘‘Bondholders’’) to provide: (a) within 185 days after the end of each fiscal year, to each nationally recognized municipal securities information repository and to any New York State information depository, core financial information and operating data for the prior fiscal year, including (i) the City’s audited general purpose financial statements, prepared in accordance with generally accepted accounting principles in effect from time to time, and (ii) material historical quantitative data on the City’s revenues, expenditures, financial operations and indebtedness generally of the type found herein in Sections IV, V and VIII and under the captions ‘‘2000-2004 Summary of Operations’’ in Section VI and ‘‘Pension Systems’’ in Section IX; and (b) in a timely manner, to each nationally recognized municipal securities information repository or to the Municipal Securities Rulemaking Board, and to any New York State information depository, notice of any of the following events with respect to the securities, if material:

59 (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the security; (7) modifications to rights of security holders; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities; (11) rating changes; and (12) failure of the City to comply with clause (a) above. Event (3) is included pursuant to a letter from the SEC staff to the National Association of Bond Lawyers dated September 19, 1995. However, event (3) may not be applicable, since the terms of the securities do not provide for ‘‘debt service reserves.’’ Events (4) and (5). The City does not undertake to provide any notice with respect to credit enhancement added after the primary offering of the securities, unless the City applies for or participates in obtaining the enhancement. Event (6) is relevant only to the extent interest on the securities is tax-exempt. Event (8). The City does not undertake to provide the above-described event notice of a mandatory scheduled redemption, not otherwise contingent upon the occurrence of an event, if (i) the terms, dates and amounts of redemption are set forth in detail in the final official statement (as defined in the Rule), (ii) the only open issue is which securities will be redeemed in the case of a partial redemption, (iii) notice of redemption is given to the Bondholders as required under the terms of the securities and (iv) public notice of redemption is given pursuant to Exchange Act Release No. 23856 of the SEC, even if the originally scheduled amounts are reduced prior to optional redemptions or security purchases. At the date hereof, there is no New York State information depository and the nationally recognized municipal securities information repositories are: Bloomberg Municipal Repository, 100 Business Park Drive, Skillman, New Jersey 08558; Standard & Poor’s Securities Evaluations, Inc., 55 Water Street, 45th Floor, New York, New York 10041; DPC Data Inc., One Executive Drive, Fort Lee, New Jersey 07024; and FT Interactive Data, 100 William Street, New York, New York 10038, Attn: NRMSIR. Filings may be made either directly with such repositories or through a central information repository approved in accordance with Rule 15c2-12. No Bondholder may institute any suit, action or proceeding at law or in equity (‘‘Proceeding’’) for the enforcement of the Undertaking or for any remedy for breach thereof, unless such Bondholder shall have filed with the Corporation Counsel of the City evidence of ownership and a written notice of and request to cure such breach, and the City shall have refused to comply within a reasonable time. All Proceedings shall be instituted only as specified herein, in the federal or State courts located in the Borough of Manhattan, State and City of New York, and for the equal benefit of all holders of the outstanding securities benefitted by the same or a substantially similar covenant, and no remedy shall be sought or granted other than specific performance of the covenant at issue. Any amendment to the Undertaking may only take effect if: (a) the amendment is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the City, or type of business conducted; the Undertaking, as amended, would have complied with the

60 requirements of the Rule at the time of award of the securities after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and the amendment does not materially impair the interests of Bondholders, as determined by parties unaffiliated with the City (such as, but without limitation, the City’s financial advisor or bond counsel); and the annual financial information containing (if applicable) the amended operating data or financial information will explain, in narrative form, the reasons for the amendment and the ‘‘impact’’ (as that word is used in the letter from the staff of the SEC to the National Association of Bond Lawyers dated June 23, 1995) of the change in the type of operating data or financial information being provided; or

(b) all or any part of the Rule, as interpreted by the staff of the SEC at the date of the Undertaking, ceases to be in effect for any reason, and the City elects that the Undertaking shall be deemed terminated or amended (as the case may be) accordingly.

For purposes of the Undertaking, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares investment power which includes the power to dispose, or to direct the disposition of, such security, subject to certain exceptions, as set forth in the Undertaking. An assertion of beneficial ownership must be filed, with full documentary support, as part of the written request to the Corporation Counsel described above.

Financial Advisors

The City has retained Public Resources Advisory Group and A.C. Advisory, Inc. to act as financial advisors with respect to the City’s financing program and the issuance of the Bonds.

Further Information

The references herein to, and summaries of, federal, State and local laws, including but not limited to the State Constitution, the Financial Emergency Act, the MAC Act and the City Charter, and documents, agreements and court decisions, including but not limited to the Financial Plan, are summaries of certain provisions thereof. Such summaries do not purport to be complete and are qualified in their entirety by reference to such acts, laws, documents, agreements or decisions, copies of which are available for inspection during business hours at the office of the Corporation Counsel.

Copies of the most recent financial plan submitted to the Control Board are available upon written request to the Office of Management and Budget, Attn: Director of Investor Relations, 75 Park Place, New York, New York 10007, and copies of the published Comprehensive Annual Financial Reports of the Comptroller are available upon written request to the Office of the Comptroller, Deputy Comptroller for Public Finance, Fifth Floor, Room 517, Municipal Building, One Centre Street, New York, New York 10007. Financial plans are prepared quarterly, and the Comprehensive Annual Financial Report of the Comptroller is typically prepared at the end of October of each year.

Neither this Official Statement nor any statement which may have been made orally or in writing shall be construed as a contract or as a part of a contract with the original purchasers or any holders of the Bonds.

THE CITY OF NEW YORK

61 [THIS PAGE INTENTIONALLY LEFT BLANK.] APPENDIX A

ECONOMIC AND DEMOGRAPHIC INFORMATION

This section presents information regarding certain economic and demographic information about the City. All information is presented on a calendar year basis unless otherwise indicated. The data set forth are the latest available. Sources of information are indicated in the text or immediately following the tables. Although the City considers the sources to be reliable, the City has made no independent verification of the information provided by non-City sources and does not warrant its accuracy.

New York City Economy

The City has a highly diversified economic base, with a substantial volume of business activity in the service, wholesale and retail trade and manufacturing industries and is the location of many securities, banking, law, accounting, new media and advertising firms.

The City is a major seaport and focal point for international business. Many of the major corporations headquartered in the City are multinational in scope and have extensive foreign operations. Numerous foreign-owned companies in the United States are also headquartered in the City. These firms, which have increased in number substantially over the past decade, are found in all sectors of the City’s economy, but are concentrated in trade, professional and business services, tourism and finance. The City is the location of the headquarters of the United Nations, and several affiliated organizations maintain their principal offices in the City. A large diplomatic community exists in the City to staff the missions to the United Nations and the foreign consulates.

Economic activity in the City has experienced periods of growth and recession and can be expected to experience periods of growth and recession in the future. The City experienced a recession in the early 1970s through the middle of that decade, followed by a period of expansion in the late 1970s through the late 1980s. The City fell into recession again in the early 1990s which was followed by an expansion that lasted until 2001. The Financial Plan assumes that the economic slowdown that began in 2001 as a result of the September 11 attack, a national economic recession, and a downturn in the securities industry came to an end in 2004. The Financial Plan assumes continued moderate growth in calendar year 2005.

Personal Income

Total personal income for City residents, unadjusted for the effects of inflation and the differential in living costs, increased from 1993 to 2003 (the most recent year for which City personal income data are available). From 1993 to 2003, personal income in the City averaged 4.3% growth compared to 5.1% for the nation. After increasing by 2.5% in 2003, total personal income is estimated by OMB to have increased in 2004. The following table sets forth information regarding personal income in the City from 1993 to 2003.

A-1 PERSONAL INCOME(1) Per Capita Per Capita Total NYC Personal Personal NYC as Personal Income Income Income a Percent of Year ($ billions) NYC U.S. U.S. 1993 ...... $201.9 $26,898 $21,356 126.0% 1994 ...... 207.5 27,403 22,176 123.6 1995 ...... 221.2 28,981 23,078 125.6 1996 ...... 234.1 30,407 24,176 125.8 1997 ...... 245.5 31,579 25,334 124.7 1998 ...... 262.0 33,341 26,880 124.0 1999 ...... 275.4 34,658 27,933 124.1 2000 ...... 296.0 36,912 29,847 123.7 2001 ...... 302.7 37,520 30,572 122.7 2002 ...... 299.3 36,989 30,806 120.1 2003 ...... 306.7 37,815 31,476 120.1

Sources: U.S. Department of Commerce, Bureau of Economic Analysis and the Bureau of the Census. Data as of March 15, 2005. (1) In current dollars. Personal Income is based on the place of residence and is measured from income which includes wages and salaries, supplements to wages and salaries, proprietors’ income, personal dividend income, personal interest income, rental income of persons, and transfer payments.

Employment Trends The City is a leading center for the banking and securities industry, life insurance, communications, publishing, fashion design and retail fields. From 1989 to 1992, the City lost approximately 9% of its employment base. From 1993 to 2001, the City experienced significant private sector job growth with the addition of approximately 423,000 new private sector jobs (an average annual growth rate of approxi- mately 2.0%). In 2002 and 2003, average annual employment in the City fell by approximately 108,600 and 51,800 jobs, respectively. In 2004, average annual employment in the City increased by 10,000 jobs. As of March 2005, total employment in the City was approximately 3,548,000 compared to approximately 3,522,400 in March 2004, an increase of approximately 0.7%. The table below shows the distribution of employment from 1994 to 2004.

EMPLOYMENT DISTRIBUTION

Average Annual Employment (in thousands) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Goods Producing Sectors Construction ...... 88 90 91 93 101 112 120 122 116 113 111 Manufacturing ...... 212 208 200 201 196 187 177 156 139 127 120 Service Producing Sectors Trade Transportation and Utilities . 526 533 533 538 542 556 570 557 536 534 538 Information...... 152 154 159 163 166 173 187 200 177 164 162 FinancialActivities...... 472 467 464 468 477 481 489 474 445 434 435 Professional and Business Services . 437 445 468 494 525 553 587 582 550 537 537 Education and Health Services .... 536 552 565 576 589 606 620 627 646 658 667 LeisureandHospitality...... 201 208 217 228 236 244 257 260 255 260 269 Other Services ...... 121 123 125 129 134 142 147 149 150 149 150 Total Private ...... 2,744 2,779 2,823 2,890 2,966 3,053 3,154 3,127 3,015 2,975 2,988 Government ...... 578 560 546 552 561 567 569 565 569 557 554 Total ...... 3,322 3,339 3,369 3,442 3,528 3,621 3,723 3,692 3,584 3,532 3,542

Note: Totals may not add due to rounding. Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are presented using the North American Industry Classification System (‘‘NAICS’’).

A-2 Sectoral Distribution of Employment and Income In 2003, the City’s service producing sectors provided approximately 2.8 million jobs and accounted for approximately 77% of total employment. Figures on the sectoral distribution of employment in the City from 1980 to 2000 reflect a significant shift to the service producing sectors and a shrinking manufacturing base relative to the nation. The structural shift to the service producing sectors affects the total earnings as well as the average wage per employee because employee compensation in certain of those sectors, such as financial activities and professional and business services, tends to be considerably higher than in most other sectors. Moreover, average wage rates in these sectors are significantly higher in the City than in the nation. In the City in 2003, the employment share for the financial activities and professional and business services sectors was approximately 28% while the earnings share for that same sector was approximately 47%.In the nation, those same service producing sectors accounted for only approximately 18% of employment and 25% of earnings in 2003. Due to the earnings distribution in the City, sudden or large shocks in the financial markets may have a disproportionately adverse effect on the City relative to the nation. The City’s and the nation’s employment and earnings by sector for 2003 are set forth in the following table.

Sectoral Distribution of Employment and Earnings in 2003(1)

Employment Earnings(2) NYC U.S. NYC U.S. Goods Producing Sectors Mining...... 0.0% 0.4% 0.2% 0.8% Construction ...... 3.2 5.2 3.2 6.1 Manufacturing ...... 3.6 11.2 2.7 13.5 Total Goods Producing ...... 6.8 16.8 6.1 20.4 Service Producing Sectors Trade, Transportation and Utilities ...... 15.1 19.5 9.3 16.3 Information ...... 4.6 2.5 7.7 3.9 Financial Activities ...... 12.3 6.1 27.2 10.0 Professional and Business Services ...... 15.2 12.3 19.4 14.8 Education and Health Services ...... 18.6 12.8 11.1 10.8 Leisure & Hospitality...... 7.4 9.4 3.8 3.9 Other Services ...... 4.2 4.2 2.5 3.0 Total Service Producing...... 77.4 66.6 81.1 62.8 Total Private Sector ...... 84.2 83.4 88.8 83.5 Government(3) ...... 15.8 16.6 11.2 16.5

Note: Data may not add due to rounding or restrictions on reporting earnings data. Data are presented using NAICS. Sources: The two primary sources are the U.S. Department of Labor, Bureau of Labor Statistics and the U.S. Department of Commerce, Bureau of Economic Analysis. (1) The sectoral distributions are obtained by dividing each industry’s employment or earnings by total non-agricultural employment or earnings. (2) Includes the sum of wage and salary disbursements, other labor income and proprietor’s income. The latest information available is 2003 data. (3) Excludes military establishments. The comparison of employment and earnings in 1980 and 2000 set forth below is presented using the industry classification system which was in use until the adoption of NAICS in the late 1990’s. Though NAICS has been implemented for most government industry statistical reporting, most historical earnings data have not been converted. Furthermore, it is not possible to compare data from the two classification

A-3 systems except in the general categorization of government, private and total employment. The table below reflects the overall increase in the service producing sectors and the declining manufacturing base in the City from 1980 to 2000.

The City’s and the nation’s employment and earnings by industry are set forth in the following table.

SECTORAL DISTRIBUTION OF EMPLOYMENT AND EARNINGS(1)

Employment Earnings(2) 1980 2000 1980 2000 NYC U.S. NYC U.S. NYC U.S. NYC U.S. Private Sector: Non-Manufacturing: Services ...... 27.0% 19.8% 39.1% 30.7% 26.0% 18.4% 30.2% 28.7% Wholesale and Retail Trade ...... 18.6 22.5 16.8 23.0 15.1 16.6 9.3 14.9 Finance, Insurance and Real Estate ..... 13.6 5.7 13.2 5.7 17.6 5.9 35.5 10.0 Transportation and Public Utilities ...... 7.8 5.7 5.7 5.3 10.1 7.6 5.2 6.8 Contract Construction ...... 2.3 4.8 3.3 5.1 2.6 6.3 2.9 5.9 Mining ...... 0.0 1.1 0.0 0.4 0.4 2.1 0.1 1.0 Total Non-Manufacturing ...... 69.3 59.6 78.1 70.3 71.8 56.9 83.2 67.3 Manufacturing: Durable ...... 4.4 13.4 1.6 8.4 3.7 15.9 1.3 10.5 Non-Durable ...... 10.6 9.0 4.9 5.6 9.5 8.9 4.8 6.1 Total Manufacturing ...... 15.0 22.4 6.5 14.0 13.2 24.8 6.1 16.6 Total Private Sector ...... 84.3 82.0 84.7 84.3 85.2 82.1 89.8 84.6 Government(3) ...... 15.7 18.0 15.3 15.7 14.8 17.9 10.3 15.4

Note: Totals may not add due to rounding. Data are presented using the Standard Industrial Classification System (‘‘SICS’’). Sources: The two primary sources of employment and earnings information are U.S. Dept. of Labor, Bureau of Labor Statistics, and U.S. Department of Commerce, Bureau of Economic Analysis. (1) The sectoral distributions are obtained by dividing each industry’s employment or earnings by total non-agricultural employment or earnings. (2) Includes the sum of wage and salary disbursements, other labor income, and proprietors’ income. The latest information available for the City is 2000 data. (3) Excludes military establishments. Unemployment As of March 2005, the total unemployment rate in the City was 5.3% compared to 8.0% in March 2004. The annual unemployment rate of the City’s resident labor force is shown in the following table.

A-4 ANNUAL UNEMPLOYMENT RATE(1) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 NewYorkCity ...... 8.7% 8.2% 8.8% 9.4% 8.0% 6.7% 5.7% 6.0% 7.9% 8.4% 7.1% United States ...... 6.1% 5.6% 5.4% 5.0% 4.5% 4.2% 4.0% 4.8% 5.8% 6.0% 5.5% Note: Monthly and semi-annual data are not seasonally adjusted. Because these estimates are based on a sample rather than a full count of population, these data are subject to sampling error. Accordingly, small differences in the estimates over time should be interpreted with caution. The Current Population Survey includes wage and salary workers, domestic and other household workers, self-employed persons and unpaid workers who work 15 hours or more during the survey week in family businesses. Source: U.S. Department of Labor, BLS. (1) Percentage of civilian labor force unemployed: excludes those persons unable to work and discouraged workers (i.e., persons not actively seeking work because they believe no suitable work is available). Public Assistance As of April 2005, the number of persons receiving public assistance in the City was 419,098 compared to 438,062 in April 2004. The following table sets forth the number of persons receiving public assistance in the City. PUBLIC ASSISTANCE(1) (Annual Averages in Thousands) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1,140.7 1,109.5 1,003.3 873.6 760.1 668.2 573.0 492.8 434.0 424.7 434.8

(1) Figures do not include aged, disabled or blind persons who were transferred from public assistance to the SSI program, which is primarily federally funded.

Taxable Sales The City is a major retail trade market with the greatest volume of retail sales of any city in the nation. The sales tax is levied on a variety of economic activities including retail sales, utility and communication sales, services and manufacturing. The total taxable sales volume has grown steadily since 1993 with a growth rate averaging over 5%. It is projected that total taxable sales will increase in 2003 after having decreased in 2002. The following table illustrates the volume of sales and purchases subject to the sales tax from 1992 to 2002.

TAXABLE SALES AND PURCHASES SUBJECT TO SALES TAX (In Billions) Utility & Communication All Year(1) Retail(2) Sales(3) Services(4) Manufacturing Other(5) Total 1992 ...... $23.8 $ 7.3 $ 8.9 $3.2 $ 7.9 $51.1 1993 ...... 24.1 9.4 9.1 3.2 8.7 54.5 1994 ...... 26.2 9.3 10.3 3.3 8.1 57.2 1995 ...... 27.6 9.0 10.7 3.3 8.8 59.4 1996 ...... 29.1 9.8 11.4 3.6 9.3 63.2 1997 ...... 31.5 9.8 13.5 3.9 8.8 67.5 1998 ...... 33.4 9.8 14.8 4.2 9.7 71.9 1999 ...... 35.0 9.6 16.1 4.2 9.6 74.5 2000(6) ...... 29.9 9.8 19.4 2.1 15.4 76.6 2001(6) ...... 25.1 11.3 21.4 2.2 19.0 79.1 2002(6) ...... 25.0 11.8 20.5 1.9 16.2 75.4

Source: State Department of Taxation and Finance publication ‘‘Taxable Sales and Purchases, County and Industry Data.’’ (1) For 1992 through 1999, the yearly data is for the period from September 1 of the year prior to the listed year through August 31 of the listed year. For 2000 through 2002 the yearly data is for the period from March 1 of the year prior to the listed year through the last day of February of the listed year. (2) Retail sales include building materials, general merchandise, food, auto dealers/gas stations, apparel, furniture, eating and drinking and miscellaneous retail. (3) Utility and Communication sales include electric and gas and communication. (Footnotes continued on the next page)

A-5 (Footnotes continued from previous page) (4) Services include business services, hotels, personal services, auto repair and other services. (5) Other sales include construction, wholesale trade and others. Beginning in 2000, Other sales also includes arts, entertainment and recreation. (6) Prior to 2000, the sectors were classified according to SICS. Beginning in 2000, the sectors are classified according to NAICS. The definitions of certain categories have changed.

Population

The City has been the most populous city in the United States since 1790. The City’s population is almost as large as the combined population of Los Angeles, Chicago and Houston, the three next most populous cities in the nation.

POPULATION Total Year Population 1970 ...... 7,895,563 1980 ...... 7,071,639 1990 ...... 7,322,564 2000 ...... 8,008,278

Note: Figures do not include an undetermined number of undocumented aliens. Source: U.S. Department of Commerce, Bureau of the Census. The following table sets forth the distribution of the City’s population by age between 1990 and 2000.

DISTRIBUTION OF POPULATION BY AGE 1990 2000 Age % of Total % of Total Under 5...... 509,740 7.0 540,878 6.8 5to14...... 907,549 12.4 1,091,931 13.6 15to19...... 470,786 6.4 520,641 6.5 20to24...... 576,581 7.9 589,831 7.4 25to34...... 1,369,510 18.7 1,368,021 17.1 35to44...... 1,116,610 15.2 1,263,280 15.8 45to54...... 773,842 10.6 1,012,385 12.6 55to64...... 644,729 8.8 683,454 8.5 65andOver...... 953,317 13.0 937,857 11.7

Source: U.S. Department of Commerce, Bureau of the Census.

Housing

In 1999, the housing stock in the City consisted of approximately 3,039,000 housing units, excluding certain special types of units primarily in institutions such as hospitals and universities (‘‘Housing Units’’). The 1999 housing inventory represented an increase of approximately 44,000 units, or 1.5%, since 1996 and an increase of approximately 62,000 units, or 2.1%, since 1993. The 1999 Housing and Vacancy Survey indicates that rental housing units predominate in the City. Of all occupied housing units in 1999, approximately 34% were conventional home-ownership units, cooperatives or condominiums and approximately 66% were rental units. In 2002, the housing stock in the City consisted of approximately 3,209,000 Housing Units. Due to the difference in the inventory basis for the draft 2002 Housing and Vacancy Survey and previous Housing and Vacancy Surveys, it is not possible to accurately compare 2002 results to the results of earlier Surveys until such time as the data is reweighted. The following table presents trends in the housing inventory in the City.

A-6 HOUSING INVENTORY (In Thousands)

Ownership/Occupancy Status 1981 1984 1987 1991 1993 1996 1999 2002 Total Housing Units ...... 2,792 2,803 2,840 2,981 2,977 2,995 3,039 3,209 Owner Units ...... 755 807 837 858 825 858 932 997 Owner-Occupied ...... 746 795 817 829 805 834 915 982 Vacant for Sale ...... 9 12 19 29 20 24 17 15 Rental Units ...... 1,976 1,940 1,932 2,028 2,040 2,027 2,018 2,085 Renter-Occupied ...... 1,934 1,901 1,884 1,952 1,970 1,946 1,953 2,024 Vacant for Rent ...... 42 40 47 77 70 81 64 61 Vacant Not Available for Sale or Rent(1) 62 56 72 94 111 110 89 127

Note: Details may not add up to totals due to rounding. Sources: U.S. Bureau of the Census, 1981, 1984, 1987, 1991, 1993, 1996, 1999 and draft 2002 New York City Housing and Vacancy Surveys. (1) Vacant units that are dilapidated, intended for seasonal use, held for occasional use, held for maintenance purposes or other reasons.

LARGEST REAL ESTATE TAXPAYERS No single taxpayer accounts for 10% or more of the City’s real property tax. For the 2005 fiscal year, the billable assessed valuation of real estate of utility corporations is $9.0 billion. The following table presents the 40 non-utility properties having the greatest assessed valuation in the 2005 fiscal year as indicated in the tax rolls. 2005 2005 Fiscal Year Fiscal Year Assessed Assessed Property Valuation Property Valuation Met Life Building ...... $248,720,000 Equitable Tower...... $147,150,000 General Motors Building ...... 244,605,000 Morgan Guaranty...... 145,650,000 International Building ...... 223,289,467 Chase World Headquarters ...... 145,030,000 Stuyvesant Town ...... 218,680,000 Bear Stearns Bldg (Madison Ave.) . . 144,810,000 Sperry Rand Building...... 215,100,000 Time Warner Center ...... 138,208,674 McGraw-Hill Building ...... 208,730,000 Waldorf-Astoria ...... 138,000,000 Time & Life Building ...... 202,390,000 Simon & Schuster Building ...... 133,722,000 Empire State Building ...... 197,470,000 1335 Sixth Avenue ...... 132,525,000 Credit Lyonnais Building ...... 197,069,998 617-35 Lexington Avenue ...... 129,876,120 Alliance Capital Building ...... 195,690,000 One Liberty Plaza ...... 129,356,644 Solow Building ...... 194,580,000 595 Lexington Avenue ...... 129,100,000 Bear Stearns Building (Park Ave.). . 189,044,742 One Astor Plaza...... 129,060,000 Celanese Building ...... 183,000,000 1 Chase Manhattan Plaza ...... 128,475,000 Bristol Meyers Building ...... 181,890,000 Kalikow Building ...... 125,330,000 One Penn Plaza ...... 181,710,000 Park Avenue Plaza...... 124,380,000 UBS Financial Services Bldg...... 176,339,993 Carpet Center...... 121,510,000 Worldwide Plaza ...... 174,270,000 IBMTower...... 115,740,000 Paramount Plaza ...... 157,880,000 Park Avenue Atrium...... 115,200,000 Morgan Stanley Building ...... 151,883,500 Continental Illinois ...... 114,300,000 666 Fifth Avenue...... 147,767,400 7 Times Square...... 109,305,000

Source: The City of New York, Department of Finance, Bureau of Real Property Assessment.

A-7 [THIS PAGE INTENTIONALLY LEFT BLANK.] APPENDIX B

BASIC FINANCIAL STATEMENTS OF THE CITY OF NEW YORK

June 30, 2004 and 2003

INDEX

Page

Independent Auditors’ Report ...... B-3 Management’s Discussion and Analysis ...... B-4 Government-wide Financial Statements: Statement of Net Assets—June 30, 2004 ...... B-26 Statement of Net Assets—June 30, 2003 ...... B-27 Statement of Activities—for the year ended June 30, 2004 ...... B-28 Statement of Activities—for the year ended June 30, 2003 ...... B-29 Fund Financial Statements: Governmental Funds—Balance Sheet—June 30, 2004 ...... B-30 Governmental Funds—Balance Sheet—June 30, 2003 ...... B-31 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets— June 30, 2004 ...... B-32 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets— June 30, 2003 ...... B-33 Governmental Funds—Statement of Revenues, Expenditures and Changes in Fund Balances— for the year ended June 30, 2004 ...... B-34 Governmental Funds—Statement of Revenues, Expenditures and Changes in Fund Balances— for the year ended June 30, 2003 ...... B-35 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities—for the year ended June 30, 2004 ...... B-36 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities—for the year ended June 30, 2003 ...... B-37 General Fund—Statement of Revenues, Expenditures and Changes in Fund Balance—Budget and Actual—for the year ended June 30, 2004 ...... B-38 General Fund—Statement of Revenues, Expenditures and Changes in Fund Balance—Budget and Actual—for the year ended June 30, 2003 ...... B-39 Fiduciary Funds—Statement of Fiduciary Net Assets—June 30, 2004 ...... B-40 Fiduciary Funds—Statement of Fiduciary Net Assets—June 30, 2003 ...... B-41 Fiduciary Funds—Statement of Changes in Fiduciary Net Assets—for the year ended June 30, 2004 ...... B-42 Fiduciary Funds—Statement of Changes in Fiduciary Net Assets—for the year ended June 30, 2003 ...... B-43 Component Units—Statement of Net Assets—June 30, 2004 ...... B-44 Component Units—Statement of Net Assets—June 30, 2003 ...... B-45 Component Units—Statement of Activities—for the year ended June 30, 2004 ...... B-46 Component Units—Statement of Activities—for the year ended June 30, 2003 ...... B-47 Notes to Financial Statements A. Summary of Significant Accounting Policies ...... B-48 B. Reconciliation of Government-wide and Fund Financial Statements ...... B-63 C. Stewardship, Compliance, and Accountability ...... B-63 D. Detailed Notes on All Funds ...... B-64 E. Other Information ...... B-76

B-1

Deloitte & Touche LLP

Two World Financial Center New York, NY 10281-1414 USA

Tel: +1 212 436 2000 Fax: +1 212 436 5000 www.deloitte.com

Independent Auditors’ Report The People of The City of New York We have audited the accompanying financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of New York, New York, (the “City”) as of and for the years ended June 30, 2004 and 2003, which collectively comprise the City’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City of New York’s management. Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of those entities disclosed in Note E.1 which represent 36 percent and 17 percent and 37 percent and 19 percent, as of and for the years ended June 30, 2004 and 2003 respectively, of the assets and revenues of the government-wide financial statements and 20 percent and 17 percent and 20 percent and 26 percent, as of and for the years ended June 30, 2004 and 2003 respectively, of the assets and revenues of the fund financial statements of the City of New York. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities disclosed in Note E.1, is based on the report of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinions. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City New York, New York, as of June 30, 2004 and 2003, and the respective changes in financial position, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. The Management’s Discussion and Analysis as listed in the table of contents is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required 2004 and 2003 supplementary information. However, we did not audit the information and express no opinion on it.

October 25, 2004

Member of Deloitte Touche Tohmatsu

B-3 MANAGEMENT’S DISCUSSION AND ANALYSIS Overview of the The following is a narrative overview and analysis of the financial activities of The City of Financial Statements New York (City) for the fiscal years ended June 30, 2004 and 2003. This discussion and analysis is intended to serve as an introduction to the City’s basic financial statements, which have the following components: (1) government-wide financial statements, (2) fund financial statements, and (3) notes to the financial statements. Government-wide The government-wide financial statements are designed to provide readers with a broad financial statements overview of the City’s finances in a manner similar to a private-sector business. The statement of net assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents information showing how the City’s net assets changed during the fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in the statement for some items that will only result in cash flows in future fiscal periods (for example, uncollected taxes, and earned, but unused vacation leave). The government-wide financial statements present information about the City as a primary government, which includes the City’s blended component units. All of the activities of the primary government are considered to be governmental activities. This information is presented separately from the City’s discretely presented component units. Fund financial statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements, including the Financial Emergency Act. Governmental funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. Governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of a fiscal year. Such information may be useful in evaluating a government’s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate the comparison between governmental funds and governmental activities. The City adopts an annual appropriated budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the City’s own programs. The fiduciary funds include the Pension and Other Employee Benefit Trust Funds and the Agency Funds.

B-4 Notes to the financial statements The notes to the financial statements provide additional information that is essential for a full understanding of the information provided in the government-wide and fund financial statements. The notes also present certain required supplementary information concerning the City’s progress in funding its obligation to provide pension benefits to its employees. Financial Reporting Entity The financial reporting entity consists of the primary government, including the Department of Education of The City of New York and the community colleges of the City University of New York, other organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization’s governing body and it is able to either impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. Blended Component Units Certain component units, despite being legally separate from the primary government, are blended with the primary government. These component units all provide services exclusively to the City and thus are reported as if they were part of the primary government. The blended component units, which are all reported as nonmajor governmental funds, comprise the following: Municipal Assistance Corporation for The City of New York (MAC) New York City Transitional Finance Authority (TFA) New York City Samurai Funding Corporation (SFC) (dissolved in fiscal year 2004) TSASC, Inc. (TSASC) New York City Educational Construction Fund (ECF) New York City School Construction Authority (SCA) Discretely Presented Discretely presented component units are legally separate from the primary government and Component Units are reported as discretely presented component units because the City appoints a majority of these organizations’ boards, is able to impose its will on them, or a financial benefit/burden situation exists. The following entities are presented discretely in the City’s financial statements as major component units: New York City Health and Hospitals Corporation (HHC) New York City Off-Track Betting Corporation (OTB) New York City Housing Development Corporation (HDC) New York City Housing Authority (HA) New York City Economic Development Corporation (EDC) New York City Water and Sewer System (NYW) • New York City Water Board (Water Board) • New York City Municipal Water Finance Authority (Water Authority) The following entities are presented discretely in the City’s financial statements as nonmajor component units: New York City Industrial Development Agency (IDA) Business Relocation Assistance Corporation (BRAC) Brooklyn Navy Yard Development Corporation (BNYDC) Jay Street Development Corporation (JSDC) New York City Marketing Development Corporation (MDC)

B-5 Financial Analysis of the In the government-wide financial statements, all of the activities of the City, aside from its Government-wide discretely presented component units, are considered governmental activities. Governmental Financial statements activities increased the City’s net assets by $83.106 million during fiscal year 2004, and decreased net assets by $3.064 billion during fiscal year 2003 and by $3.837 billion during fiscal year 2002. As mentioned previously, the basic financial statements include a reconciliation between the fiscal year 2004 governmental funds statement of revenues, expenditures, and changes in fund balances which reports an increase of $1.5 billion in fund balances and the reported increase in the excess of assets over liabilities reported in the government-wide statement of activities $83.1 million, a difference of $1.4 billion. A similar reconciliation is provided for fiscal year 2003 amounts. Key elements of the reconciliation of these two statements are that the government-wide statement of activities report the issuance of debt as a liability, the purchases of capital assets as assets which are then charged to expense over their useful lives (depreciated) and changes in long-term liabilities as adjustments of expenses. Conversely, the governmental funds statements report the issuance of debt as an other financing source of funds, the repayment of debt as an expenditure, the purchase of capital assets as an expenditure and do not reflect changes in long-term liabilities. Key elements of these changes are as follows: Governmental Activities ______for the fiscal years ended June 30, ______2004 ______2003 ______2002 (in thousands) Revenues: Program revenues: Charges for services ...... $ 3,286,407 $ 2,790,609 $ 3,001,330 Operating grants and contributions . . . 14,507,980 14,515,404 14,336,509 Capital grants and contributions . . . . . 477,280 455,520 493,798 General revenues: Taxes ...... 28,493,546 23,412,848 21,939,595 Investment income ...... 49,677 102,433 155,122 Other Federal and State aid ...... 1,254,101 1,743,466 975,281 Other ...... ______348,915 ______377,613 ______416,553 Total revenues ...... ______48,417,906 ______43,397,893 ______41,318,188

Expenses: General government ...... 2,602,630 1,928,755 2,124,613 Public safety and judicial ...... 9,566,889 8,762,321 9,519,218 Education ...... 14,539,644 14,499,037 13,249,344 City University ...... 668,841 558,417 591,345 Social services ...... 10,283,512 9,785,682 9,567,970 Environmental protection ...... 2,453,205 2,055,835 2,171,605 Transportation services ...... 1,702,394 2,083,259 1,246,997 Parks, recreation and cultural activities . . 560,670 607,787 705,691 Housing ...... 745,544 787,584 896,743 Health (including payments to HHC) . . . 2,853,898 2,709,563 2,816,360 Libraries ...... 263,976 377,647 161,250 Debt service interest ...... ______2,093,597 ______2,306,469 ______2,103,685 Total expenses ...... ______48,334,800 ______46,462,356 ______45,154,821 Change in net assets ...... 83,106 (3,064,463) (3,836,633) Net Deficit—Beginning ...... ______(26,604,520) ______(23,540,057) ______(19,703,424) Net Deficit—Ending ...... $(26,521,414)______$(26,604,520)______$(23,540,057)______

B-6 In fiscal year 2004, government-wide revenues increased from fiscal year 2003 levels by approximately $5.0 billion, while government-wide expenses grew by approximately $1.9 billion. The major components of the government-wide revenue increases were: • An increase in real estate tax resulting from full-year impact of the 18.5% tax rate increase effective January 1, 2003 and a continuing increase in billable assessed values on the fiscal year 2004 final roll. • An increase in the sales tax resulting from the .125% increase in the sales tax rate effective June 4, 2003 and the expiration of the exemption on clothing and footwear purchases under $100 dollars effective June 1, 2003. In addition, an increase in underlying sales activity resulting from the strength in durable sales spurred by the booming real estate transaction market as well as the local economic recovery and the recovery in tourism. • An increase in personal income tax resulting from the temporary upper income tax increase implementing two new top tax rates effective for calendar years 2003 through 2005, yet implemented through a withholding table increase effective July 1, 2003. In addition, personal income tax payments on underlying liability increased as a result of the near record Wall Street profits seen in calendar year 2003 and the consequent high bonus payouts. • An increase in other income taxes (the general corporation, banking corporation and the unincorporated business tax) resulting from the rebound in Wall Street profits in calendar year 2003 as well as significant declines in refund payouts as payments on account from prior year overpayments of tax are liquidated. • An increase in other taxes resulting primarily from the skyrocketing real property transaction tax revenues (real property transfer tax and mortgage recording tax) as further declines in interest rates spur real estate transactions and lead to a peak in mortgage refinancing. • A decrease in other Federal and State Aid as compared to fiscal 2003, when funding from FEMA was received for previously incurred costs related to the September 11, 2001 World Trade Center (WTC) disaster. • Increases in charges for services primarily resulting from increases in the charges and enforcement activity for parking violations and the sales of new taxi medallions. The major components of the government-wide expense increases were: • Increases in pension costs for city workers, especially in the uniform forces, as well as increase in health insurance costs. • An increase in social service spending reflecting increased number of eligible clients and inflation of medical services and pharmaceutical costs in the Medicaid program, as well as increased case loads in the public assistance program. • An increase in education spending offset, in part, by reductions in long-term liabilities for related employees’ vacation and sick leave.

B-7 In fiscal year 2003, government-wide revenues increased from fiscal year 2002 levels by approximately $2.1 billion, while government-wide expenses grew by approximately $1.3 billion. The major components of the government-wide revenue increases were: • An increase in real estate tax, resulting from a real estate tax rate increase of 18.5% for the second half of the fiscal year and the continuing increase in real property valuation. • An increase in non-property taxes, resulting from the increase in sales taxes driven by rebounding tourism, a cigarette tax rate increase, and real property transaction taxes driven by a boom in real estate sales and refinancing. These were partially offset by declines in income taxes, which reflect the continued weakness of other sectors of the economy. • An increase in other Federal and State aid, resulting from the funding by FEMA of additional costs previously incurred by the City as a result of the WTC disaster. • Changes in operating grants composed primarily of decreases in Federal FEMA reimbursements for costs of the September 11, 2001 WTC disaster and offset in part by increases from: – State and Federal aid for the City’s Department of Education; – receipt from HHC to reimburse the City for a portion of the judgments and settlement payments made by the City for HHC related claims; – Medicaid reimbursements for the Department of Health and Mental Hygiene services that were increased to reflect the expansion of the early intervention program, and a one-time retroactive claim; The major components of the government-wide expense increases were: • an increase in education spending primarily as a result of collectively bargained salary increases; • an increase in transportation spending due to the acceleration of payments (discretionary transfers) to the NYC Transit Authority in City fiscal year 2001 (which reduced fiscal year 2002 payments) and fiscal year 2003; • an increase in social service spending reflecting increased Medicaid costs and larger numbers of homeless families and individuals seeking shelter; and • the fiscal year 2002 results included significant spending in general government, public safety, environmental protection, and health functions related to the recovery and clean- up efforts following the September 11, 2001 attack on the WTC. Hence, decreased spending was seen in these areas in fiscal year 2003. The following two charts compare the expenses for each of the City’s programs with the revenues that are derived from each program for fiscal years 2004 and 2003. The excess of program expenses over revenues represents the net cost of each program that must be financed from the City’s general revenues.

B-8 Expenses and Program Revenues — Governmental Activities June 30, 2004

$16,000 Expenses

$14,000 Program Revenues

$12,000

$10,000

$8,000 (in millions) $6,000

$4,000

$2,000

$0 t en m rn Health Housing Libraries ove Education g l a Social services er City University en G Debt service interest Transportation services Public safety and judicial Environmental protection

Parks, recreation and cultural activities

Functions / Programs

Expenses and Program Revenues — Governmental Activities June 30, 2003

$16,000 Expenses

$14,000 Program Revenues

$12,000

$10,000

$8,000 (in millions) $6,000

$4,000

$2,000

$0 t en m rn Health Housing Libraries ove Education g l a Social services er City University en G Debt service interest Transportation services Public safety and judicial Environmental protection

Parks, recreation and cultural activities

Functions / Programs

B-9 The following chart compares the amounts of program and general revenues for fiscal years 2004 and 2003:

Revenues by Source — Governmental Activities for the Years Ended June 30, 2004 and 2003

40% 2004 2003 35%

30%

25%

20%

15% % of Total Revenues Total % of

10%

5%

0% es ic rv Other se r o f Other taxes es rg a Real estate Salestaxes & use taxes h Investment income C Personal incomeIncome tax taxes, other

Other Federal & State aid

Capital grants and contributions Operating grants and contributions Functions / Programs

As noted earlier, increases and decreases of net assets may over time serve as a useful indicator of changes in a government’s financial position. In the case of the City, liabilities exceed assets by $26.5 billion at the close of the most recent fiscal year, a decrease of $.1 billion from June 30, 2003, which had increased $3.064 billion from June 30, 2002. ______Governmental Activities ______2004 ______2003 ______2002 (in thousands) Current and other assets ...... $ 19,691,909 $ 17,635,396 $ 17,520,338 Capital assets ...... ______29,958,556 ______28,894,866 ______26,659,071 Total assets ...... ______49,650,465 ______46,530,262 ______44,179,409 Long-term liabilities outstanding . . . . 61,288,787 59,455,298 54,684,089 Other liabilities ...... ______14,883,092 ______13,679,484 ______13,035,377 Total liabilities ...... ______76,171,879 ______73,134,782 ______67,719,466 Net assets: Invested in capital assets, net of related debt ...... (6,157,298) (4,770,629) (2,372,441) Restricted ...... 2,239,532 1,651,595 2,519,338 Unrestricted ...... ______(22,603,648) ______(23,485,486) ______(23,686,954) Total net deficit ...... $(26,521,414)______$(26,604,520)______$(23,540,057)______

B-10 The excess of liabilities over assets reported on the government-wide statement of net assets is a result of several factors. The largest component of the net deficit is the result of the City having long-term debt with no corresponding capital assets. The following summarizes the main components of the negative net assets value as of June 30, 2004 and 2003: ______Components of Negative Net Assets Value ______2004 ______2003 (in billions) Net Assets Invested in Capital Assets Some City-owned assets have a depreciable life used for financial reporting that is different from the period over which the related debt principal is being repaid. Schools and related education assets depreciate more quickly than their related debt is paid, and they comprise the largest component of this difference ...... ______$ (6.1) ______$ (4.8) Net Assets Restricted for: Debt Service ...... 2.0 1.0 Capital Projects ...... ______0.2 ______0.7 Total net assets restricted ...... ______2.2 ______1.7 Unrestricted Net Assets MAC issued debt during the 1970’s which funded some City operating expenses. This is the remaining MAC debt outstanding as of year end ...... (1.8) (2.2) TFA issued debt to finance costs related to the recovery from the September 11, 2001 World Trade Center disaster, which are operating expenses of the City ...... (2.1) (2.1) The City has issued debt for the acquistion and construction of public purpose capital assets which are not reported as City-owned assets on the Statement of Net Assets. This includes assets of the New York City Transit Authority, NYW, HHC, and certain public libraries and cultural institutions. This is the debt outstanding for non-City owned assets at year end ...... (11.9) (11.1) Certain long-term obligations do not require current funding: Judgments and claims ...... (4.4) (4.5) Vacation and sick leave ...... (2.6) (2.6) Pension liability ...... (0.7) (0.6) Landfill closure and postclosure costs ...... (1.3) (1.3) Other: ...... ______2.2 ______0.9 Total unrestricted net assets ...... ______(22.6) ______(23.5)

Total net deficit ...... ______$(26.5) ______$(26.6)

B-11 Financial Analysis of the As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with Governmental Funds finance-related legal requirements. The table below summarizes the changes in the fund balances of the City’s governmental funds.

Governmental Funds New York Nonmajor City Capital General Debt Governmental Adjustment/ ______General Fund ______Projects Fund ______Service Fund ______Funds ______Eliminations ______Total (in thousands) Fund balances (deficit), July 1, 2002 ...... $ 403,140 $(1,466,231) $ 697,419 $ (530,805) $ (41,561) $ (938,038) Revenues ...... 42,641,200 1,639,094 75,581 2,680,702 (1,339,793) 45,696,784 Expenditures ...... (41,992,043) (5,733,809) (2,390,629) (3,016,628) 1,392,122 (51,740,987) Other financing sources (uses) ...... ______(644,219) ____ 4,156,303______2,117,058______989,658______(8,120)______6,610,680 Fund balances (deficit), June 30, 2003 . . . . . 408,078 (1,404,643) 499,429 122,927 2,648 (371,561) Revenues ...... 47,275,666 1,936,966 76,508 1,687,004 (1,059,953) 49,916,191 Expenditures ...... (43,252,777) (5,754,507) (2,836,801) (2,365,764) 1,005,764 (53,204,085) Other financing sources (uses) ...... ______(4,018,231) ____ 3,569,376______3,454,913______1,831,622______—______4,837,680 Fund balances (deficit), June 30, 2004 . . . . . $______412,736 $(1,652,808) ______$__ _1,194,049______$__ _1,275,789______$______(51,541)______$ 1,178,225 The City’s General Fund is required to adopt an annual budget prepared on a basis consistent with generally accepted accounting principles. Surpluses from any fiscal year cannot be appropriated in future fiscal years. If the City anticipates that the General Fund will have an operating surplus, the City will make discretionary transfers to the General Debt Service Fund as well as advance payments of certain subsidies that reduce the amount of the General Fund surplus for financial reporting purposes. As detailed later, the General Fund had operating surpluses of $1.928 billion and $1.422 billion before certain expenditures and transfers (discretionary and other) for fiscal years 2004 and 2003, respectively. After these certain expenditures and transfers (discretionary and other), the General Fund reported an operating surplus of $5 million in both fiscal years 2004 and 2003, which resulted in an increase in fund balance by this amount. The General Debt Service Fund receives transfers (discretionary and other) from the General Fund from which it pays the City’s debt service requirements. Its fund balance at June 30, 2004 can be attributed principally to transfers (discretionary transfer and other, as described above) from the General Fund totaling $972 million in fiscal year 2004. Similar transfers in fiscal year 2003 of $407 million also primarily account for the General Debt Service Fund fund balance at June 30, 2003. The New York City Capital Projects Fund accounts for the financing of the City’s capital program. The primary resources are obtained from the issuance of City debt as well as transfers from TFA and TSASC. Capital-related expenditures are first paid from the General Fund, which is reimbursed for these expenditures by the New York City Capital Projects Fund. To the extent that capital expenditures exceed proceeds from bond issuances, transfers from TFA and TSASC and other revenues and financing sources, the Capital Projects Fund will have a deficit. The deficit fund balances at June 30, 2004 and 2003 are primarily attributed to amounts that are owed to the General Fund to repay it for advances related to the City’s capital program.

General Fund The following information is presented to assist the reader in comparing the original budget Budgetary Highlights (Adopted Budget), and the final amended budget (Modified Budget) and the actual results compared with these budgeted amounts. The Adopted Budget can be modified subsequent to the end of the fiscal year.

B-12 General Fund Revenues The following charts and tables summarize actual revenues by category for fiscal years 2004 and 2003 and compare revenues with each fiscal year’s Adopted Budget and Modified Budget.

General Fund Revenues Fiscal Year 2004

$18,000 Adopted Budget Modified Budget $16,000 Actual

$14,000

$12,000

$10,000

$8,000 (in millions)

General Fund Revenues $6,000

$4,000

$2,000

$0 Real estate Sales, Use and Personal Income Federal, State Other Than taxes Other taxes income tax taxes, other and Other aid Taxes and Aid

Revenue Category

General Fund Revenues

Fiscal Year 2004 (in millions)

Adopted Modified ______Budget ______Budget ______Actual

Taxes (net of refunds): Real estate taxes ...... $11,447 $11,534 $11,582 Sales and use taxes ...... 4,470 5,019 5,081 Personal income tax ...... 5,505 5,934 6,013 Income taxes, other ...... 2,648 3,125 3,691 Other taxes ...... ______1,877 ______2,288 ______1,777 Taxes (net of refunds) ...... ______25,947 ______27,900 ______28,144

Federal, State and Other aid: Categorical ...... 13,622 15,142 14,799 Unrestricted ...... ______555 ______991 ______963 Federal, State and Other aid ...... ______14,177 ______16,133 ______15,762

Other Than Taxes and Aid: Charges for services ...... 1,667 1,563 1,603 Other revenues ...... 1,526 2,071 1,767 OTB Transfers ...... ______20 ______20 ______21 Other Than Taxes and Aid ...... ______3,213 ______3,654 ______3,391 Total Revenues ...... ______$43,337 ______$47,687 ______$47,297

B-13 General Fund Revenues Fiscal Year 2003

$18,000 Adopted Budget Modified Budget $16,000 Actual

$14,000

$12,000

$10,000

$8,000 (in millions)

General Fund Revenues $6,000

$4,000

$2,000

$0 Real estate Sales, Use and Personal Income Federal, State Other Than taxes Other taxes income tax taxes, other and Other aid Taxes and Aid

Revenue Category

General Fund Revenues

Fiscal Year 2003 (in millions)

Adopted Modified ______Budget ______Budget ______Actual

Taxes (net of refunds): Real estate taxes ...... $ 9,109 $10,061 $10,063 Sales and use taxes ...... 4,209 4,298 4,321 Personal income tax ...... 4,898 4,476 4,493 Income taxes, other ...... 3,073 2,631 3,138 Other taxes ...... ______1,595 ______1,871 ______1,325 Taxes (net of refunds) ...... ______22,884 ______23,337 ______23,340

Federal, State and Other aid: Categorical ...... 13,323 15,150 14,816 Unrestricted ...... ______790 ______1,675 ______1,443 Federal, State and Other aid ...... ______14,113 ______16,825 ______16,259

Other Than Taxes and Aid: Charges for services ...... 1,589 1,436 1,481 Other revenues ...... 1,774 1,748 1,561 OTB Transfers ...... 31 22 20 Non-Major Governmental Funds Transfers . . . . .______1,625 ______1,612 ______1,684 Other Than Taxes and Aid ...... ______5,019 ______4,818 ______4,746 Total Revenues ...... ______$42,016 ______$44,980 ______$44,345

B-14 General Fund Expenditures The following charts and tables summarize actual expenditures by function/program for fiscal years 2004 and 2003 and compare expenditures with each fiscal year’s Adopted Budget and Modified Budget.

General Fund Expenditures Fiscal Year 2004

$14,000 Adopted Budget Modified Budget $12,000 Actual

$10,000

$8,000

(in millions) $6,000

General Fund Expenditures $4,000

$2,000

$0 Public Education Social HealthPensions Other Debt Safety Services Services

Function / Program

General Fund Expenditures Fiscal Year 2004 (in millions)

Adopted Modified ______Budget ______Budget ______Actual General Government ...... $ 1,360 $ 1,416 $ 1,347 Public Safety and Judicial ...... 5,851 6,221 6,125 Education ...... 12,472 12,905 13,061 City University ...... 467 525 493 Social Services ...... 8,678 9,782 9,650 Environmental Protection ...... 1,654 1,662 1,639 Transportation Services ...... 511 884 840 Parks, Recreation, and Cultural Activities ...... 289 323 317 Housing ...... 434 492 449 Health (including HHC) ...... 2,153 2,506 2,418 Libraries ...... 123 242 242 Pensions ...... 2,495 2,318 2,308 Judgments and Claims ...... 643 592 591 Fringe Benefits and Other Benefit Payments ...... 2,736 2,753 2,755 Other ...... 675 828 884 Transfers and Other Payments for Debt Service . . . .______2,796 ______4,238 ______4,173 Total Expenditures ...... ______$43,337 ______$47,687 ______$47,292

B-15 General Fund Expenditures Fiscal Year 2003

$14,000 Adopted Budget Modified Budget $12,000 Actual

$10,000

$8,000

(in millions) $6,000

General Fund Expenditures $4,000

$2,000

$0 Public Education Social Health PensionsOther Debt Safety Services Services

Function / Program

General Fund Expenditures Fiscal Year 2003 (in millions)

Adopted Modified ______Budget ______Budget ______Actual General Government ...... $ 1,172 $ 1,287 $ 1,238 Public Safety and Judicial ...... 5,898 6,298 6,204 Education ...... 12,354 12,757 12,673 City University ...... 465 478 444 Social Services ...... 9,054 9,499 9,321 Environmental Protection ...... 1,658 1,687 1,638 Transportation Services ...... 763 1,039 1,016 Parks, Recreation, and Cultural Activities ...... 298 297 293 Housing ...... 420 456 437 Health (including HHC) ...... 2,187 2,309 2,241 Libraries ...... 251 338 338 Pensions ...... 1,701 1,630 1,631 Judgments and Claims ...... 419 613 627 Fringe Benefits and Other Benefit Payments ...... 2,217 2,604 2,607 Other ...... 822 1,151 1,097 Transfers and Other Payments for Debt Service . . . .______2,337 ______2,537 ______2,535 Total Expenditures ...... ______$42,016 ______$44,980 ______$44,340

B-16 General Fund Surplus The City had General Fund operating surpluses of $1.928 billion, $1.422 billion and $686 million before certain expenditures and transfers (discretionary and other) for fiscal years 2004, 2003 and 2002, respectively. For the fiscal years 2004, 2003 and 2002, the General Fund surplus was $5 million after expenditures and transfers (discretionary and other).

The expenditures and transfers (discretionary and other) made by the City after the adoption of its fiscal years 2004, 2003 and 2002 budgets follow:

______2004 ______2003 ______2002 (in millions) Transfer, as required by law, to the General Debt Service Fund of real estate taxes collected in excess of the amount needed to finance debt service ...... $ 307 $ 166 $ 509 Discretionary transfers to the General Debt Service Fund ...... 662 237 154 Net equity contribution in bond refunding that accrued to future years debt service savings . . . . . 3 4 4 Debt service prepayments for lease purchase debt service due in the fiscal year ...... 71 73 — Grant to TFA ...... 400 624 — Advance cash subsidies to the Public Library system . . 112 107 — Advance cash subsidies to the Transit Authority . . . 209 206 14 Advance cash subsidies to the HHC ...... ______159 ______— ______— Total expenditures and transfers (discretionary and other) ...... 1,923 1,417 681 Reported Operating Surplus ...... ______5 ______5 ______5 Total Operating Surplus ...... $______1,928 $______1,422 $______686

B-17 Fiscal Year 2004 Final results for any given fiscal year may differ greatly from that year’s Adopted Budget. The following table shows the variance between actuals and amounts for the fiscal year ended 2004 Adopted Budget: ______2004 Additional Resources: (in millions) Federal categorical aid (including FEMA reimbursement) ...... $ 793 Higher than expected property tax revenue collections ...... 135 Higher than expected personal income tax revenue collections ...... 463 Higher than expected major business income tax revenue collections ...... 560 Higher than expected mortgage tax revenue collections ...... 438 Higher than expected general sales tax revenue collections ...... 171 Higher than expected net all other tax revenue collections, net of tax audit revenues ...... 432 Unrestricted aid ...... 408 State categorical aid ...... 281 Lower than expected debt service and interest on short-term notes ...... 385 Lower than expected administrative costs for supplies, equipment and other OTPS ...... 308 Other miscellaneous revenues, including asset sales ...... 209 Non-grant revenue ...... 115 General government charges ...... 124 Lower than anticipated pension costs ...... 170 Lower than anticipated judgment and claims ...... 49 Licenses, permits, privileges, and franchises ...... 23 Rental income - other ...... 17 Other charges for services ...... 18 Higher than expected revenues from fines and forfeitures ...... 15 Lower than anticipated Medicaid funding to the Health and Hospitals Corporation ...... 25 General Reserve ...... ______300 Total ...... ______5,439 Enabled the City to provide for: Higher than anticipated personal services costs excluding pensions, health insurance, and overtime ...... 491 Higher than expected other fixed and miscellaneous charges ...... 99 Higher than expected public assistance ...... 116 Increased MAC debt service costs ...... 502 Lower than expected rental income for JFK and LaGuardia Airports ...... 197 Higher than anticipated overtime costs ...... 345 Higher than anticipated Medicaid costs ...... 536 Increased contractual services costs ...... 1,147 Prepayment of certain debt service costs and subsidies due in fiscal year 2005 ...... 1,920 Lower than expected collection of water and sewer charges ...... 27 Increased health insurance costs ...... 15 Disallowance reserve ...... 12 Social Services, excluding public assistance and Medicaid ...... 4 Lower than expected interest income ...... 6 Equity contribution in conjunction with bond refundings ...... 3 All other net overspending and revenues below budget ...... ______14 Total ...... ______5,434 Reported Surplus ...... $______5

B-18 Fiscal Year 2003 Final results for any given fiscal year may differ greatly from that year’s Adopted Budget. The following tables show the variance between actuals and amounts for the fiscal year ended 2003 Adopted Budget: ______2003 Additional Resources: (in millions) Federal categorical aid (including FEMA reimbursement) ...... $ 1,199 Higher than anticipated property tax revenue collections, primarily due to a mid-year rate increase of 18.5 percent ...... 1,039 State revenue sharing ...... 73 Other unrestricted aid ...... 580 State categorical aid ...... 21 Lower than expected debt service and interest on short-term notes ...... 242 Lower than expected MAC debt service ...... 30 Other miscellaneous revenues ...... 84 Non-grant revenue ...... 305 Licenses, permits, privileges, and franchises ...... 16 Rental income—other ...... 25 Other charges for services ...... 26 General government charges ...... 66 Net savings from administrative costs for supplies, equipment and other than personnel services ...... 363 Lower than expected all other fixed and miscellaneous charges ...... 54 Lower than expected pension costs ...... 50 Social Services, excluding public assistance and Medicaid ...... 164 Lower than expected funding to the Health and Hospitals Corporation ...... 10 General Reserve ...... ______200 Total ...... ______4,547 Enabled the City to provide for: Higher than anticipated personal services costs excluding pensions, health insurance, and overtime ...... 90 Lower than expected net all other tax revenue collections, excluding tax lien sales ...... 497 Lower than expected Off-Track Betting Surtax and other revenues ...... 11 Lower than anticipated State and Federal aid ...... 230 Higher than anticipated judgment and claims ...... 172 Lower than expected tax liens sales ...... 85 Lower than expected revenues from fines and forfeitures ...... 2 Higher than anticipated public assistance ...... 39 Lower than expected interest income ...... 24 Lower than expected income from JFK and LaGuardia Airports ...... 182 Higher than anticipated overtime costs ...... 288 Increased health insurance costs ...... 325 Higher than anticipated Medicaid costs ...... 209 Increased contractual services costs ...... 869 Lower than anticipated collection of water and sewer charges ...... 42 Disallowance reserve ...... 32 Equity contributions in conjunction with bond refundings ...... 4 Prepayment of certain debt service costs and subsidies due in FY 2004 . . . . . 1,413 All other net overspending and revenues below budget ...... ______28 Total ...... ______4,542 Reported Surplus ...... $______5

B-19 Capital Assets The City’s investment in capital assets includes land, buildings, equipment, highways, bridges, traffic signals, street reconstruction, and parks, which are detailed as follows (net of accumulated depreciation): ______Governmental Activities June 30, ______2004 ______2003______2002 (in millions) Land ...... $ 761 $ 739 $ 737 Buildings ...... 17,652 16,395 11,253 Equipment ...... 2,289 2,546 1,522 Infrastructure ...... 6,569 6,242 5,950 Construction work-in-progress ...... ______2,688 ______2,973 ______7,197 Total ...... ______$29,959 ______$28,895 ______$26,659

The net increase in the City’s capital assets during fiscal year 2004 was $1.064 billion, a 3.7% increase. Capital assets additions in fiscal year 2004 were $5.058 billion, a decrease of $4.715 billion from fiscal year 2003. Capital assets additions in the Education program totaling $1.562 billion and total new construction work-in-progress (the majority of which are in the Education program) totaling $1.872 billion accounted for 68.0% of the capital assets additions in fiscal year 2004.

The net increase in the City’s capital assets during fiscal year 2003 was $2.236 billion, an 8.4% increase. Capital assets additions in fiscal year 2003 were $9.773 billion, an increase of $3.127 billion from fiscal year 2002. Capital assets additions in the Education program totaling $5.632 billion and total new construction work-in-progress (the majority of which are in the Education program) totaling $1.981 billion accounted for 78.0% of the capital assets additions in fiscal year 2003.

Additional information on the City’s capital assets can be found in the notes to the financial statements.

Debt Administration The Comptroller’s Office of Public Finance, in conjunction with the Mayor’s Office of Management and Budget, is charged with issuing debt to finance the implementation of the City’s capital program. The following table summarizes the debt outstanding for New York City and City-related issuing entities at the end of fiscal years 2004, 2003 and 2002. New York City and ______City-Related Debt ______2004 ______2003______2002 (in millions) General Obligation Bonds(a) ...... $31,378 $29,679 $28,465 1991 General Resolution Bonds (MAC) ...... 1,758 2,151 2,880 Future Tax Secured Bonds (TFA) ...... 11,337 9,997 8,289 TSASC, Inc...... 1,256 1,258 740 Japanese Yen bonds ...... — — 40 IDA Bonds ...... 108 — — Revenue Bonds ...... 107 117 125 Bond Anticipation Notes (TFA) ...... — 1,110 1,200 Recovery Notes (TFA) ...... — — 1,000 Recovery Bonds (TFA) ...... ______2,027 ______2,027 ______— Total bonds and notes payable ...... 47,971 46,339 42,739 Less treasury obligations ...... ______(51) ______(64) ______(116) Net outstanding debt ...... $47,920______$46,275______$42,623______

(a) Does not include capital contract liabilities.

General Obligation On June 30, 2004, New York City’s outstanding General Obligation (GO) debt, including capital contract liabilities, totaled $33.8 billion (compared with $31.0 and $29.2 billion as of June 30, 2003 and 2002, respectively). The State Constitution provides that, with certain exceptions,

B-20 the City may not contract indebtedness in an amount greater than 10% of the average full value of taxable real estate in the City for the most recent five years. As of June 30, 2004, the City’s net GO debt limit was $43.12 billion (compared with $40 and $36 billion as of June 30, 2003 and 2002, respectively). The remaining GO debt incurring power as of June 30, 2004, after providing for capital contract liabilities, totaled $9.28 billion.

As of June 30, 2004, the City’s outstanding GO variable and fixed rate debt totaled $5.57 billion and $25.81 billion, respectively. Of the $6.46 billion in GO bonds issued by the City in fiscal year 2004, four transactions totaling $3.42 billion were issued to refund certain outstanding bonds and five transactions totaling $3.04 billion were issued for new money capital purposes. The proceeds of the refunding issues were placed in irrevocable escrow accounts in amounts sufficient to pay when due all principal, interest, and applicable redemption premium, if any, on the refunded bonds. The refundings produce debt service savings of $32.4 million, $96.5 million and $109.8 million in fiscal years 2004, 2005 and 2006, respectively. The refundings will generate approximately $198.5 million in net present value savings throughout the lives of the bonds.

Federal legislation enacted in 2002 allowed the City to implement additional advance refundings under certain circumstances in an amount not to exceed $4.5 billion in bonds. As of June 30, 2004 a total of $3.1 billion of bonds had been designated as advanced refunding bonds under the additional advance refunding legislation, of which approximately $1.17 billion was used in the refundings completed during fiscal year 2004.

A total of $423.52 million of the $6.46 billion issued during fiscal year 2004 was issued as taxable debt. The taxable issuance was comprised of $363.83 million, that was issued competitively and $59.7 million of Qualified Zone Academy Bonds (QZABs), which were issued on a negotiated basis. These QZABs will provide, among other things, for internet connectivity to public schools in designated zones.

During fiscal year 2004, the City executed four escrow restructurings in connection with the 2003CDE, 2003FGH, 2004AB, 2004G and 2004I refundings which achieved $68.9 million in savings. Based on movements in the Treasury market, the City liquidated a portion of the securities in certain escrows and replaced them with other State and Local Government Series (SLGS) securities, which provided sufficient cashflows to satisfy the escrow requirements.

In fiscal year 2004, Moody’s Investors Service, (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch) maintained their ratings of the City’s GO debt at A2, A and A+, respectively. On January 28, 2004, Moody’s revised its outlook on New York City General Obligation Bonds from negative to stable. Standard & Poor’s maintained its stable rating outlook. On December 8, 2003, Fitch revised its outlook from negative to stable.

Short-term Financing The City satisfied all of its seasonal needs in the public credit market with a competitive sale on October 16, 2003 of $1.25 billion of short-term Revenue Anticipation Notes (RANs) that were secured by State aid and $250 million of short-term Tax Anticipation Notes (TANs) that were secured by real estate taxes. The RANs and TANs matured on April 15, 2004 and carried the highest ratings from Moody’s (MIG-1), Fitch (F1+), and S&P (SP-1+). These ratings together with favorable market conditions enabled the City to achieve a true interest cost of borrowing of .94% on the RANs and .93% on the TANs.

TFA TFA is a legal entity, created by the New York State Legislature in 1997 in order to ease the constraints imposed by the City’s debt limit. The TFA was originally authorized to issue up to $7.5 billion of debt. In fiscal year 2000, this authorization was increased by $4 billion, allowing the TFA a total debt incurring capacity of $11.5 billion. The TFA bond proceeds enable the City to continue its planned capital program. As of June 30, 2004, the TFA had reached its debt limit and did not have the authority to issue new money bonds. The TFA issued $1.94 billion of bonds during fiscal year 2004.

B-21 Of the $1.94 billion in bonds issued by the TFA in fiscal year 2004, $1.11 billion redeemed previously issued Bond Anticipation Notes (BANs), $709 million refinanced outstanding bonds, and $145 million were issued for capital purposes. The refinancing TFA completed in fiscal year 2004 will produce debt service savings of $5.7 million, $7 million and $21.1 million in fiscal years 2004, 2005 and 2006, respectively. This refinancing will also generate approximately $23.7 million in net present value savings throughout the life of the bonds.

In September 2001, the New York State Legislature approved a special TFA authorization of $2.5 billion to fund capital and operating costs related to or arising from the events of September 11, 2001. The Legislature also authorized the TFA to issue debt, without limit as to principal amount, that is payable solely from State or Federal aid received, on account of the disaster. To date, $2 billion of TFA Recovery Bonds have been issued. No recovery bonds were issued during fiscal year 2004.

In fiscal year 2004, Moody’s, S&P and Fitch maintained their ratings for TFA’s senior bonds at Aa2, AA+ and AA+, respectively. The bond anticipation notes and recovery notes were rated at MIG-1, SP-1+ and F1+ by Moody’s, S&P and Fitch. TFA’s Recovery Bonds and Recovery Notes, though secured by a lien junior to that of the TFA’s senior bonds, maintained ratings identical to those of senior lien bonds and notes. TFA debt is not subject to the City’s constitutional debt limit.

TSASC TSASC is a special purpose, bankruptcy-remote local development corporation created pursuant to the Not-for-Profit Corporation Law of the State of New York. TSASC is authorized to issue bonds to purchase from the City its future right, title and interest under a Master Settlement Agreement (the MSA) between participating cigarette manufacturers and 46 states, including the State of New York. As of June 30, 2004, TSASC had approximately $1.26 billion of bonds outstanding.

In June 2003, Moody’s downgraded R.J. Reynolds Tobacco Holdings to Ba1, which resulted in a Downgrade Trapping Event in connection with TSASC’s outstanding bonds. The trapping event requires that a portion of excess tobacco settlement revenues (TSRs), not used for debt service and that would otherwise flow to the City must be deposited in a trapping account until an amount equal to 25% of the outstanding amount of TSASC’s bonds has been accumulated in that account. As of June 30, 2004, $60.3 million had been trapped towards a requirement totaling $314 million.

In March 2004, Moody’s downgraded its rating on most TSASC bonds following a decision by the U.S. Court of Appeals — Second Circuit. The decision reversed a lower court’s dismissal of a challenge to the New York Contraband Statutes and left issuers in states belonging to the Second Circuit, particularly vulnerable to a reduction in MSA payments if the model statute is found invalid. The majority of TSASC’s bonds are now rated BBB by S&P and Baa2 by Moody’s. All of TSASC’s bonds are now rated BBB by Fitch.

TSASC does not intend to issue any additional bonds under its indenture and is reviewing restructuring alternatives for its outstanding bonds and trapping requirements. TSASC debt is not subject to the City’s constitutional debt limit.

Additional information on the City’s long-term debt can be found in Note D.5. of the Basic Financial Statements.

Water Authority The New York City Municipal Water Finance Authority (Water Authority), a separate legal entity established in fiscal year 1986, has the power to issue bonds to finance the renovation and improvement of the City’s water and sewer facilities. As of June 30, 2004, long-term outstanding Water Authority debt, including special resolution bonds, was $12.5 billion. In fiscal year 2004, Moody’s, S&P and Fitch maintained their ratings for the Water Authority’s first resolution bonds at Aa2, AA and AA, respectively.

B-22 Of the $1.7 billion in revenue bonds issued by the Water Authority during fiscal year 2004, $649 million were issued to refund certain outstanding bonds and $1.1 billion were issued for capital purposes. The proceeds of the refunding issues were placed in irrevocable escrow accounts in amounts sufficient to pay when due all principal, interest, and applicable redemption premium, if any, on the refunded bonds. The refundings, structured to generate debt service savings that are nearly level throughout the life of the bonds, will provide approximately $60 million in net present value savings.

As of June 30, 2004, outstanding Water Authority variable rate debt, not including commercial paper was $1.5 billion. During fiscal year 2004, the Water Authority’s tax-exempt dailies and tax-exempt weeklies traded at an average rate of .92% and .95%, respectively. The Water Authority also maintained its tax-exempt commercial paper program, enabling it to access the short-term market at more aggressive rates. The Water Authority’s commercial paper authorization is $925 million. At the end of fiscal year 2004, $800 million of commercial paper was outstanding.

Interest Rate Exchange Agreements In an effort to lower its borrowing costs over the life of its bonds and to diversify its existing portfolio, the City has entered into interest rate exchange agreements (swaps) and sold options related to these swaps. The City received specific authorization to enter into these agreements, or swaps, under Section 54.90 of the New York State Local Finance Law. In fiscal year 2004, the City entered into one synthetic fixed rate swap with a total notional amount of $350 million, one total return swap with a notional amount of $500 million, and two swaption agreements with a total notional amount of $350 million. Additionally, during fiscal year 2004, the Water Authority entered into an interest rate exchange agreement with BNP Paribas with a notional amount of $200 million.

Sales Tax Asset Receivable In May 2003, New York State statutorily committed $170 million of New York State Sales Corporation Tax to the City in each fiscal year from 2004 through 2034. The Sales Tax Asset Receivable Corporation (STARC) was formed to securitize the payments and to use the proceeds to retire existing Municipal Assistance Corporation (MAC) for the City of New York debt, thereby expecting to save the City approximately $500 million per year for fiscal years 2004 though 2008.

The New York State Local Government Assistance Corporation and the Division of the Budget of the State of New York filed court papers challenging the constitutionality of the statutory amendments that had authorized the transaction.

The State Supreme Court (on September 17, 2003), the State Appellate Division (on March 4, 2004) and the State Court of Appeals (on May 13, 2004) all upheld the constitutionality of the statutory amendments that had authorized the transaction. In August 2004, the $170 million was appropriated by the State and in September 2004 the amount was released to the City.

Subsequent Events Subsequent to June 30, 2004, the City completed the following financings:

On July 29, 2004, the City sold $586.8 million of bonds for refunding purposes.

On August 18, 2004, the City sold $730 million of bonds for capital purposes.

Commitments At June 30, 2004, the outstanding commitments relating to projects of the New York City Capital Projects Fund amounted to approximately $9.3 billion. To address the need for significant infrastructure and public facility capital investments, the City has prepared a ten-year capital spending program which contemplates New York City Capital Projects Fund expenditures of $43.5 billion over the remaining fiscal years 2005 through 2013. To help meet its capital spending program, the City, TFA, and TSASC borrowed $4.3 billion in the public credit market in fiscal year 2004.

B-23 Economic Factors and the On September 11, 2001, two hijacked passenger jetliners flew into the World Trade Center, World Trade Center Attack resulting in a substantial loss of life, destruction of the World Trade Center, and damage to other buildings in the vicinity. Trading on the major New York stock exchanges was suspended until September 17, 2001, and business in the financial district was interrupted. Continuing recovery, clean up, and repair efforts have resulted in substantial expenditures. The City has been largely reimbursed by the Federal government for all of its direct costs for response and remediation of the World Trade Center site. In addition, the State authorized TFA to have outstanding $2.5 billion of bonds (Recovery Bonds) and notes (Recovery Notes) to pay costs (Recovery Costs) related to or arising from the September 11 attack, of which TFA currently has outstanding approximately $2.0 billion. It is not possible to quantify at present with any certainty the long-term impact of the September 11 attack on the City and its economy. Request for Information This financial report is designed to provide a general overview of the City’s finances for all those with an interest in its finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to The City of New York, Office of the Comptroller, Bureau of Accountancy, 1 Centre Street, Room 808, New York, New York 10007-2341.

B-24

THE CITY OF NEW YORK STATEMENT OF NET ASSETS JUNE 30, 2004 (in thousands)

Primary______Government Governmental Component ______Activities ______Units ASSETS: Cash and cash equivalents ...... $ 2,133,928 $ 1,385,316 Investments, including accrued interest ...... 5,709,589 698,203 Receivables: Real estate taxes (less allowance for uncollectible amounts of $346,481) ...... 553,546 — Federal, State and other aid ...... 4,794,292 — Taxes other than real estate ...... 2,596,367 — Other ...... 774,068 1,340,334 Mortgage loans and interest receivable, net ...... 636 3,529,919 Inventories ...... 229,454 42,474 Due from Primary Government ...... — 3,323 Due from Component Units ...... 865,615 — Restricted cash and investments ...... 1,086,712 3,430,119 Deferred Charges—Issuance Costs ...... 858,000 — Capital assets: Land and construction work-in-progress ...... 3,448,338 4,585,022 Other Capital assets (net of depreciation): Property, plant and equipment ...... 19,941,358 18,047,123 Infrastructure ...... 6,568,860 — Other ...... ______89,702______271,937______Total assets ...... ____ 49,650,______465______33,333,770______LIABILITIES: Accounts payable and accrued liabilities ...... 10,139,088 1,838,891 Accrued interest payable ...... 604,334 69,056 Deferred revenues: Prepaid real estate taxes ...... 2,381,536— Other ...... 1,176,791 184,492 Due to Primary Government ...... — 865,615 Due to Component Units ...... 3,323 — Estimated disallowance of Federal, State and other aid ...... 276,660 — Payable for investment securities purchased ...... 257,000 — Other ...... 44,360 53,187 Noncurrent Liabilities: Due within one year ...... 4,031,648 1,388,398 Due in more than one year ...... ____ 57,257,139______17_____,871,719______Total liabilities ...... ____ 76,171,8______79_____ 22,271,358______NET ASSETS: Invested in capital assets, net of related debt ...... (6,157,298) 9,055,631 Restricted for: Capital projects ...... 234,826 147,484 Debt service ...... 2,004,706 745,917 Loans/Security Deposits ...... — 71,623 Donor/Statutory restrictions ...... — 37,939 Operations ...... — 135,691 Unrestricted (deficit) ...... ___ (_22,603,648)______868,127______Total net assets (deficit) ...... _ $(26,521,414)______$11,062,412______See accompanying notes to financial statements

B-26 THE CITY OF NEW YORK STATEMENT OF NET ASSETS JUNE 30, 2003 (in thousands)

Primary______Government Governmental Component ______Activities ______Units ASSETS: Cash and cash equivalents ...... $ 4,317,621 $ 1,273,878 Investments, including accrued interest ...... 719,369 593,608 Receivables: Real estate taxes (less allowance for uncollectible amounts of $371,484) ...... 534,497 — Federal, State and other aid ...... 6,447,866 — Taxes other than real estate ...... 2,380,014 — Other ...... 610,739 1,545,391 Mortgage loans and interest receivable, net ...... 1,307 3,183,236 Inventories ...... 213,957 47,410 Due from Primary Government ...... — 13,213 Due from Component Units ...... 603,988 — Restricted cash and investments ...... 1,119,324 3,790,822 Deferred Charges—Issuance Costs ...... 589,152 — Capital assets: Land and construction work-in-progress ...... 3,711,398 3,561,632 Other Capital assets (net of depreciation): Property, plant and equipment ...... 18,940,986 17,563,670 Infrastructure ...... 6,242,482 — Other ...... ______97,562______308,722______Total assets ...... ____ 46,530,______262______31,881,582______LIABILITIES: Accounts payable and accrued liabilities ...... 9,118,121 1,810,530 Accrued interest payable ...... 637,960 74,184 Deferred revenues: Prepaid real estate taxes ...... 2,051,819— Other ...... 1,244,516 168,070 Due to Primary Government ...... — 603,988 Due to Component Units ...... 13,213 — Estimated disallowance of Federal, State and other aid ...... 249,660 — Payable for investment securities purchased ...... 257,000 — Other ...... 107,195 56,304 Noncurrent Liabilities: Due within one year ...... 4,247,112 1,198,979 Due in more than one year ...... ____ 55,208,186______16_____,940,939______Total liabilities ...... ____ 73,134,7______82_____ 20,852,994______NET ASSETS: Invested in capital assets, net of related debt ...... (4,770,629) 8,580,870 Restricted for: Capital projects ...... 675,338 241,303 Debt service ...... 976,257 707,694 Loans/Security Deposits ...... — 88,920 Donor restrictions ...... — 13,352 Operations ...... — 132,107 Unrestricted (deficit) ...... ___ (_23,485,486)______1,264,342______Total net assets (deficit) ...... _ $(26,604,520)______$11,028,588______See accompanying notes to financial statements

B-27 THE CITY OF NEW YORK STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2004 (in thousands)

Net (Expense) Revenue and ______Program Revenues ______Changes in Net Assets Primary ______Government Operating Capital Grants Charges for Grants and and Governmental Component ______Functions/Programs ______Expenses ______Services ______Contributions ______Contributions_____ Activities______Units Primary government: General government ...... $ 2,602,630 $ 552,720 $ 557,415 $ 8,762 $ (1,483,733) $ — Public safety and judicial ...... 9,566,889 413,094 515,304 — (8,638,491) — Education ...... 14,539,644 48,173 7,695,181 69,862 (6,726,428) — City University ...... 668,841 186,610 141,174 — (341,057) — Social services ...... 10,283,512 46,285 4,310,766 11,165 (5,915,296) — Environmental protection ...... 2,453,205 988,107 12,818 79,238 (1,373,042) — Transportation services ...... 1,702,394 766,752 153,686 153,894 (628,062) — Parks, recreation and cultural activities ...... 560,670 62,616 10,022 1,698 (486,334) — Housing ...... 745,544 166,050 220,397 103,475 (255,622) — Health (including payments to HHC) ...... 2,853,898 56,000 891,217 49,186 (1,857,495) — Libraries ...... 263,976———(263,976) — Debt service interest ...... ______2,093,597——— ______(2,093,597)______— Total primary government ...... $48,334,800______$______3,286,407 $14,507,980______$______477,280_____ (30,063,133)______— Component Units ...... $10,289,405______$______6,858,692 $______1,836,666 $______1,036,173 — ______(557,874) General revenues: Taxes (Net of Refunds): Real estate taxes ...... 11,608,054 — Sales and use taxes ...... 5,103,655 — Personal income tax ...... 6,067,771 — Income taxes, other ...... 3,934,138 — Other taxes ...... 1,779,928 — Investment income ...... 49,677 131,416 Other Federal and State aid ...... 1,254,101 1,677 Other ...... _____ 348,915______458,605 Total General revenues ...... _____ 30,146,239______591,698 Change in net assets ...... 83,106 33,824 Net assets (deficit) — beginning ...... _____ (26,604,520)______11,028,588 Net assets (deficit) — ending ...... $(26,521,414)______$11,062,412______

See accompanying notes to financial statements

B-28 THE CITY OF NEW YORK STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2003 (in thousands)

Net (Expense) Revenue and ______Program Revenues ______Changes in Net Assets Primary ______Government Operating Capital Grants Charges for Grants and and Governmental Component ______Functions/Programs ______Expenses ______Services ______Contributions ______Contributions_____ Activities______Units Primary government: General government ...... $ 1,928,755 $ 539,379 $ 355,117 $ 79,163 $ (955,096) $ — Public safety and judicial ...... 8,762,321 248,212 690,489 30,316 (7,793,304) — Education ...... 14,499,037 44,203 7,476,132 8,546 (6,970,156) — City University ...... 558,417 152,782 136,413 — (269,222) — Social services ...... 9,785,682 70,924 4,373,853 23,207 (5,317,698) — Environmental protection ...... 2,055,835 827,446 40,269 36,724 (1,151,396) — Transportation services ...... 2,083,259 609,148 160,777 178,166 (1,135,168) — Parks, recreation and cultural activities ...... 607,787 58,351 10,328 86 (539,022) — Housing ...... 787,584 194,226 186,006 75,384 (331,968) — Health (including payments to HHC) ...... 2,709,563 45,938 1,086,020 23,928 (1,553,677) — Libraries ...... 377,647———(377,647) — Debt service interest ...... ______2,306,469——— ______(2,306,469)______— Total primary government ...... $46,462,356______$______2,790,609 $14,515,404______$______455,520_____ (28,700,823)______— Component Units ...... $______9,949,843 $______6,479,248 $______1,895,582 $______1,028,283 —_____ (546,730)______General revenues: Taxes (Net of Refunds): Real estate taxes ...... 9,919,734 — Sales and use taxes ...... 4,326,464 — Personal income tax ...... 4,996,749 — Income taxes, other ...... 2,840,916 — Other taxes ...... 1,328,985 — Investment income ...... 102,433 169,354 Other Federal and State aid ...... 1,743,466 2,139 Other ...... _____ 377,613______322,505 Total General revenues ...... _____ 25,636,360______493,998 Change in net assets ...... (3,064,463) (52,732) Net Assets (deficit) — Beginning ...... _____ (23,540,057)______11,081,320 Net Assets (deficit) — Ending ...... $(26,604,520)______$11,028,588______

See accompanying notes to financial statements

B-29 THE CITY OF NEW YORK GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2004 (in thousands)

New York City General Nonmajor Total Capital Debt Governmental Adjustments/Governmental ______General ______Projects ______Service ______Funds ______Eliminations ______Funds ASSETS: Cash and cash equivalents ...... $1,530,468 $ 44,515 $ 130,157 $ 428,788 $ — $2,133,928 Investments, including accrued interest 4,326,259 — 1,071,964 369,008 (57,642) 5,709,589 Accounts receivable: Real estate taxes (less allowance for uncollectible amounts of $346,481) 553,546————553,546 Federal, State and other aid ...... 4,395,567 398,725———4,794,292 Taxes other than real estate ...... 2,510,367 — — 251,229 (165,229) 2,596,367 Other ...... 774,068————774,068 Mortgage loans and interest receivable (less allowance for uncollectible amounts of $695,515) ...... ———636—636 Due from other funds ...... 2,820,581 1,268,368 — 182,049 (182,049) 4,088,949 Due from Component Units ...... 414,453 451,162———865,615 Restricted cash and investments . . . . . — 327,201 — 759,511 — 1,086,712 Other ...... ______— ______41,363 ______— ______33,267 ______— ______74,630 Total assets ...... $17,325,309______$______2,531,334 $______1,202,121 $______2,024,488 $______(404,920) $22,678,332______LIABILITIES AND FUND BALANCES: Liabilities: Accounts payable and accrued liabilities ...... $ 8,884,317 $ 1,072,671 $ 664 $ 240,470 $ (59,034) $10,139,088 Accrued tax refunds: Real estate taxes ...... 33,470————33,470 Personal income taxes ...... 37,514 — — 52,933 — 90,447 Other ...... 29,202————29,202 Accrued judgments and claims . . . . . 343,218 103,156———446,374 Deferred revenues: Prepaid real estate taxes ...... 2,381,536————2,381,536 Uncollected real estate taxes ...... 474,240————474,240 Taxes other than real estate ...... 1,891,964 — — 112,296 (112,296) 1,891,964 Other ...... 1,288,761 13,093 — 86,000 — 1,387,854 Due to other funds ...... 1,268,368 2,995,222 7,408 — (182,049) 4,088,949 Due to Component Units ...... 3,323————3,323 Estimated disallowance of Federal, State and other aid ...... 276,660————276,660 Payable for investment securities purchased ...... ———______257,000 ______— ______257,000 Total liabilities ...... ______16,912,573 ______4,184,142 ______8,072 ______748,699 ______(353,379) ______21,500,107 Fund balances: Reserved for: Capital projects ...... — 225,851 — 8,975 — 234,826 Debt service ...... — — 1,194,049 861,562 (51,541) 2,004,070 Noncurrent mortgage loans ...... ———636—636 Unreserved (deficit), reported in: General Fund ...... 412,736————412,736 New York City Capital Projects Fund — (1,878,659) — — — (1,878,659) Nonmajor Governmental Funds . . . . .———______404,616 ______— ______404,616 Total fund balances (deficit) . .______412,736 ______(1,652,808) ______1,194,049 ______1,275,789 ______(51,541) ______1,178,225 Total liabilities and fund balances . . . . . $17,325,309______$______2,531,334 $______1,202,121 $______2,024,488 $______(404,920) $22,678,332______The reconciliation of the fund balances of governmental funds to the net assets (deficit) of governmental activities in the Statement of Net Assets is presented in an accompanying schedule. See accompanying notes to financial statements.

B-30 THE CITY OF NEW YORK GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2003 (in thousands)

New York City General Nonmajor Total Capital Debt Governmental Adjustments/ Governmental ______General ______Projects ______Service ______Funds ______Eliminations ______Funds ASSETS: Cash and cash equivalents ...... $ 3,595,882 $ 33,093 $ 56,039 $ 632,607 $ — $ 4,317,621 Investments, including accrued interest 82,723 — 306,922 395,717 (65,993) 719,369 Accounts receivable: Real estate taxes (less allowance for uncollectible amounts of $371,484) 534,497————534,497 Federal, State and other aid ...... 6,088,533 359,333———6,447,866 Taxes other than real estate ...... 2,276,165 — — 103,849 — 2,380,014 Other ...... 601,339————601,339 Mortgage loans and interest receivable (less allowance for uncollectible amounts of $753,475) ...... ———1,307 — 1,307 Due from other funds ...... 2,820,581 1,574,822 148,355 225,694 (228,588) 4,540,864 Due from Component Units ...... 372,597 231,391———603,988 Restricted cash and investments . . . . . — 629,819 — 489,505 — 1,119,324 Other ...... ______— ______40,618 ______— ______41,872 ______— ______82,490 Total assets ...... $16,372,317______$ ______2,869,076 $______511,316 $ ______1,890,551 $______(294,581) $21,348,679______LIABILITIES AND FUND BALANCES: Liabilities: Accounts payable and accrued liabilities ...... $ 7,818,703 $ 1,069,698 $ 4,479 $ 293,882 $ (68,641) $ 9,118,121 Bond anticipation notes payable . . . .———1,110,000 — 1,110,000 Accrued tax refunds: Real estate taxes ...... 40,754————40,754 Personal income taxes ...... 46,971 — — 15,949 — 62,920 Other ...... 46,684————46,684 Accrued judgments and claims . . . . . 312,795 113,705———426,500 Deferred revenues: Prepaid real estate taxes ...... 2,051,819————2,051,819 Uncollected real estate taxes ...... 503,413————503,413 Taxes other than real estate ...... 1,881,776————1,881,776 Other ...... 1,316,523 13,093 — 87,900 — 1,417,516 Due to other funds ...... 1,681,928 3,077,223 7,408 2,893 (228,588) 4,540,864 Due to Component Units ...... 13,213————13,213 Estimated disallowance of Federal, State and other aid ...... 249,660————249,660 Payable for investment securities purchased ...... ———______257,000 ______— ______257,000 Total liabilities ...... ______15,964,239 ______4,273,719 ______11,887 ______1,767,624 ______(297,229) ______21,720,240 Fund balances: Reserved for: Capital projects ...... — 539,334 — 136,004 — 675,338 Debt service ...... — — 499,429 472,872 2,648 974,949 Noncurrent mortgage loans ...... ———1,308 — 1,308 Unreserved (deficit), reported in: General Fund ...... 408,078————408,078 New York City Capital Projects Fund — (1,943,977) — — — (1,943,977) Nonmajor Governmental Funds . . .———(______487,257) ______— ______(487,257) Total fund balances (deficit) . .______408,078 ______(1,404,643) ______499,429 ______122,927 ______2,648 ______(371,561) Total liabilities and fund balances . . . $16,372,317______$ ______2,869,076 $______511,316 $ ______1,890,551 $______(294,581) ______$21,348,679 The reconciliation of the fund balances of governmental funds to the net assets (deficit) of governmental activities in the Statement of Net Assets is presented in an accomanying schedule. See accompanying notes to financial statements. B-31 THE CITY OF NEW YORK RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS JUNE 30, 2004 (in thousands)

Amounts reported for governmental activities in the Statement of Net Assets are different because:

Total fund balances—governmental funds ...... $ 1,178,225

Inventories recorded in the Statement of Net assets are recorded as expenditures in the governmental funds ...... 229,454 Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds ...... 29,958,556 Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds ...... 3,450,339 Long-term liabilities are not due and payable in the current period and accordingly are not reported in the funds: Bonds notes payable ...... (48,095,621) Accrued interest payable ...... (604,334) Other Long-term liabilities ...... ______(12,638,033) Net assets (deficit) of governmental activities ...... ______$(26,521,414)

See accompanying notes to financial statements

B-32 THE CITY OF NEW YORK RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS JUNE 30, 2003 (in thousands)

Amounts reported for governmental activities in the Statement of Net Assets are different because:

Total fund balances—governmental funds ...... $ (371,561)

Inventories recorded in the Statement of Net assets are recorded as expenditures in the governmental funds ...... 213,957 Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds ...... 28,894,866 Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds ...... 3,171,813 Long-term liabilities are not due and payable in the current period and accordingly are not reported in the funds: Bonds and notes payable ...... (45,035,810) Accrued interest payable ...... (637,960) Other Long-term liabilities ...... ______(12,839,825) Net assets (deficit) of governmental activities ...... ______$(26,604,520)

See accompanying notes to financial statements.

B-33 THE CITY OF NEW YORK GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2004 (in thousands)

New York City General Nonmajor Total Capital Debt Governmental Adjustments/ Governmental ______General ______Projects ______Service ______Funds ______Eliminations ______Funds REVENUES: Real estate taxes ...... $11,582,328 $ — $ — $ — $ — $11,582,328 Sales and use taxes ...... 5,081,287————5,081,287 Personal income tax ...... 6,012,580 — — 108,828 (52,933) 6,068,475 Income taxes, other ...... 3,690,835————3,690,835 Other taxes ...... 1,776,925————1,776,925 Federal, State and other categorical aid ...... 14,798,636 429,126———15,227,762 Unrestricted Federal and State aid ...... 963,445————963,445 Charges for services ...... 1,602,899————1,602,899 Tobacco settlement ...... 66,934 — — 146,792 — 213,726 Investment income ...... 30,068 — 3,282 23,448 (10,255) 46,543 Interest on mortgages, net ...... — — — 5,474 — 5,474 Unrestricted grant from New York City ...... — — — 400,000 — 400,000 Unrealized loss on investment ...... — — — (9,044) — (9,044) Other revenues ...... ______1,669,729 ______1,507,840 ______73,226 ______1,011,506 ______(996,765) ______3,265,536 Total revenues ...... ______47,275,666 ______1,936,966 ______76,508 ______1,687,004 ______(1,059,953) ______49,916,191 EXPENDITURES: Current Operations: General government ...... 1,347,292 607,245 — 19,817 — 1,974,354 Public safety and judicial ...... 6,125,145 241,549———6,366,694 Education ...... 13,061,366 1,192,048 — 991,830 (996,765) 14,248,479 City University ...... 492,889 15,998———508,887 Social services ...... 9,650,124 112,001———9,762,125 Environmental protection ...... 1,638,733 1,803,700———3,442,433 Transportation services ...... 839,726 962,003———1,801,729 Parks, recreation and cultural activities . . . 316,756 328,344———645,100 Housing ...... 448,656 359,612———808,268 Health (including payments to HHC) . . . . . 2,418,122 88,480———2,506,602 Libraries ...... 241,790 43,527———285,317 Pensions ...... 2,308,370————2,308,370 Judgments and claims ...... 591,001————591,001 Fringe benefits and other benefit payments 2,755,010————2,755,010 Administrative and other ...... 884,288 — 15,405 14,314 — 914,007 Debt Service: Interest ...... 7,370 — 1,389,364 708,733 3,481 2,108,948 Redemptions ...... — — 1,428,982 631,070 (12,480) 2,047,572 Lease payments ...... 126,139————126,139 Refunding escrow ...... ______— ______— ______3,050 ______— ______— ______3,050 Total expenditures ...... ______43,252,777 ______5,754,507 ______2,836,801 ______2,365,764 ______(1,005,764) ______53,204,085 Excess (deficiency) of revenues over expenditures ...... ______4,022,889 ______(3,817,541) ______(2,760,293) ______(678,760) ______(54,189) ______(3,287,894) OTHER FINANCING SOURCES (USES): Transfers from General Fund ...... — — 3,526,689 504,472 — 4,031,161 Transfers from (to) Nonmajor Capital Projects Funds ...... — 315,027 — (5,059) (315,027) (5,059) Transfers from (to) Component Units, net . . . 12,930————12,930 Principal amount of bonds issued ...... — 3,044,690 — 1,270,617 — 4,315,307 Bond premium ...... — 5,007 — 44,895 — 49,902 Capitalized leases ...... — 204,652———204,652 Refunding bond proceeds ...... — — 3,563,846 784,328 — 4,348,174 Transfer to New York City Capital Projects Fund ...... — — — (315,027) 315,027 — Transfers from (to) General Debt Service Fund (3,526,689) — — 2,830 — (3,523,859) Transfer from (to) Nonmajor Debt Service Funds, net ...... (504,472) — (2,830) 5,059 — (502,243) Payments to refunded bond escrow holder . . .______— ______— ______(3,632,792) ______(460,493) ______— ______(4,093,285) Total other financing sources (uses) . . . .______(4,018,231) ______3,569,376 ______3,454,913 ______1,831,622 ______— ______4,837,680 Net change in fund balances ...... 4,658 (248,165) 694,620 1,152,862 (54,189) 1,549,786 FUND BALANCES (DEFICIT) AT BEGINNING OF YEAR .______408,078 ______(1,404,643) ______499,429 ______122,927 ______2,648 ______(371,561) FUND BALANCES (DEFICIT) AT END OF YEAR ...... ______$ 412,736 $(1,652,808)______$1,194,049 $______1,275,789 $______(51,541) $______1,178,225 The reconciliation of the net change in fund balances of governmental funds to the change in net assets of governmental activities in the Statement of Net Assets is presented in an accompanying schedule. See accompanying notes to financial statements.

B-34 THE CITY OF NEW YORK GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2003 (in thousands)

New York City General Nonmajor Total Capital Debt Governmental Adjustments/ Governmental ______General ______Projects ______Service ______Funds ______Eliminations ______Funds REVENUES: Real estate taxes ...... $10,062,930 $ — $ — $ — $ — $10,062,930 Sales and use taxes ...... 4,321,464————4,321,464 Personal income tax ...... 4,492,947 — — 536,802 — 5,029,749 Income taxes, other ...... 3,137,916————3,137,916 Other taxes ...... 1,325,222————1,325,222 Federal, State and other categorical aid ...... 14,816,057 387,675———15,203,732 Unrestricted Federal and State aid ...... 1,442,813————1,442,813 Charges for services ...... 1,481,382————1,481,382 Tobacco settlement ...... 149,948 — — 102,895 — 252,843 Investment income ...... 43,256 — 3,660 42,164 — 89,080 Interest on mortgages, net ...... — — — 3,981 — 3,981 Unrestricted grant from New York City ...... — — — 624,000 — 624,000 Other revenues ...... ______1,367,265 ______1,251,419 ______71,921 ______1,370,860 ______(1,339,793) ______2,721,672 Total revenues ...... ______42,641,200 ______1,639,094 ______75,581 ______2,680,702 ______(1,339,793) ______45,696,784 EXPENDITURES: General government ...... 1,238,442 608,431 — 34,375 — 1,881,248 Public safety and judicial ...... 6,203,911 290,007———6,493,918 Education ...... 12,672,864 1,315,422 — 1,376,211 (1,339,793) 14,024,704 City University ...... 443,654 12,763———456,417 Social services ...... 9,321,286 80,609———9,401,895 Environmental protection ...... 1,638,442 1,415,282———3,053,724 Transportation services ...... 1,016,155 1,185,237———2,201,392 Parks, recreation and cultural activities . . . 293,182 360,808———653,990 Housing ...... 437,382 300,984———738,366 Health (including payments to HHC) . . . . . 2,241,495 115,049———2,356,544 Libraries ...... 337,639 49,217———386,856 Pensions ...... 1,630,581————1,630,581 Judgments and claims ...... 626,916————626,916 Fringe benefits and other benefit payments 2,606,860————2,606,860 Administrative and other ...... 1,096,970 — 11,131 32,926 — 1,141,027 Debt Service: Interest ...... 10,602 — 1,320,039 673,926 (54) 2,004,513 Redemptions ...... — — 1,055,010 899,190 (52,275) 1,901,925 Lease payments ...... 175,662————175,662 Refunding escrow ...... ______— ______— ______4,449 ______— ______— ______4,449 Total expenditures ...... ______41,992,043 ______5,733,809 ______2,390,629 ______3,016,628 ______(1,392,122) ______51,740,987 Excess (deficiency) of revenues over expenditures ...... ______649,157 ______(4,094,715) ______(2,315,048) ______(335,926) ______52,329 ______(6,044,203) OTHER FINANCING SOURCES (USES): Transfers from (to) General Fund ...... — — 2,109,622 (1,450,691) (8,120) 650,811 Transfers from Nonmajor Capital Projects Funds ...... 1,670,837 1,926,954 — 107,961 (1,926,954) 1,778,798 Transfers from (to) Component Units, net . . . 6,592————6,592 Principal amount of bonds issued ...... — 2,149,998 — 4,299,609 — 6,449,607 Bond premium ...... — 37,433 — 61,734 — 99,167 Capitalized leases ...... — 41,918———41,918 Refunding bond proceeds ...... — — 2,790,193 2,142,187 — 4,932,380 Transfer to New York City Capital Projects Fund ...... — — — (1,926,954) 1,926,954 — Transfers to General Debt Service Fund . . . . . (2,109,622) — — (7,436) — (2,117,058) Transfer from (to) Nonmajor Debt Service Funds, net ...... (212,026) — 7,436 (107,961) — (312,551) Payments to refunded bond escrow holder . . .______— ______— ______(2,790,193) ______(2,128,791) ______— ______(4,918,984) Total other financing sources (uses) . . . .______(644,219) ______4,156,303 ______2,117,058 ______989,658 ______(8,120) ______6,610,680 Net change in fund balances ...... 4,938 61,588 (197,990) 653,732 44,209 566,477 FUND BALANCES (DEFICIT) AT BEGINNING OF YEAR .______403,140 ______(1,466,231) ______697,419 ______(530,805) ______(41,561) ______(938.038) FUND BALANCES (DEFICIT) AT END OF YEAR ...... ______$ 408,078 $(1,404,643)______$______499,429 $______122,927 $______2,648 $______(371,561)

The reconciliation of the net change in fund balances of governmental funds to the change in net assets of governmental activities in the Statement of Activities is presented in an accompanying schedule. See accompanying notes to financial statements.

B-35 THE CITY OF NEW YORK RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2004 (in thousands)

Amounts reported for governmental activities in the Statement of Activities are different because:

Net change in fund balances—governmental funds ...... $ 1,549,786

Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Purchases of capital assets ...... $ 2,901,369 Depreciation expense ...... ______(1,800,106) 1,101,263 The net effect of various miscellaneous transactions involving capital assets and other (i.e. sales, trade-ins, and donations) is to decrease net assets ...... (156,906) The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. Proceeds from sales of bonds ...... (8,663,481) Principal payments of bonds ...... 6,090,955 Other ...... ______(119,636) (2,692,162) Some expenses reported in the statement of activities do not require the use of current financial resources and therefore, are not reported as expenditures in governmental funds ...... (48,294) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds ...... ______329,419 Change in net assets—governmental activities ...... $______83,106

See accompanying notes to financial statements.

B-36 THE CITY OF NEW YORK RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2003 (in thousands)

Amounts reported for governmental activities in the Statement of Activities are different because:

Net change in fund balances—governmental funds ...... $ 566,477

Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Purchases of capital assets ...... $ 3,567,561 Depreciation expense ...... ______(2,090,831) 1,476,730 The net effect of various miscellaneous transactions involving capital assets and other (i.e., sales, trade-ins, and donations) is to decrease net assets ...... 849,930 The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. Proceeds from sales of bonds ...... (6,548,774) Principal payments of bonds ...... 1,985,445 Other ...... ______(169,589) (4,732,918) Some expenses reported in the statement of activities do not require the use of current financial resources and therefore, are not reported as expenditures in governmental funds ...... (741,711) Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds ...... ______(482,971) Change in net assets—governmental activities ...... $______(3,064,463)

See accompanying notes to financial statements.

B-37 THE CITY OF NEW YORK GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL FOR THE YEAR ENDED JUNE 30, 2004 (in thousands) Better (Worse) Than ______Budget Modified ______Adopted ______Modified ______Actual ______Budget REVENUES: Real estate taxes ...... $11,447,000 $11,534,093 $11,582,328 $ 48,235 Sales and use taxes ...... 4,469,450 5,018,450 5,081,287 62,837 Personal income tax ...... 5,505,372 5,934,112 6,012,580 78,468 Income taxes, other ...... 2,648,100 3,125,100 3,690,835 565,735 Other taxes ...... 1,876,535 2,288,387 1,776,925 (511,462) Federal, State and other categorical aid ...... 13,621,988 15,141,742 14,798,636 (343,106) Unrestricted Federal and State aid ...... 555,419 991,348 963,445 (27,903) Charges for services ...... 1,666,814 1,563,184 1,602,899 39,715 Tobacco settlement ...... 115,349 64,505 66,934 2,429 Investment income ...... 35,930 28,105 30,068 1,963 Other revenues ...... ______1,374,650 ______1,978,275 ______1,669,729 ______(308,546) Total revenues ...... ______43,316,607 ______47,667,301 ______47,275,666 ______(391,635) EXPENDITURES: General government ...... 1,359,513 1,416,131 1,347,292 68,839 Public safety and judicial ...... 5,851,109 6,220,756 6,125,145 95,611 Education ...... 12,472,297 12,905,414 13,061,366 (155,952) City University ...... 466,837 524,726 492,889 31,837 Social services ...... 8,677,932 9,781,630 9,650,124 131,506 Environmental protection ...... 1,654,181 1,662,384 1,638,733 23,651 Transportation services ...... 511,501 883,595 839,726 43,869 Parks, recreation and cultural activities ...... 288,716 322,506 316,756 5,750 Housing ...... 433,990 492,458 448,656 43,802 Health (including payments to HHC) ...... 2,153,367 2,506,498 2,418,122 88,376 Libraries ...... 122,712 241,903 241,790 113 Pensions ...... 2,494,509 2,318,370 2,308,370 10,000 Judgments and claims ...... 642,706 591,624 591,001 623 Fringe benefits and other benefit payments ...... 2,736,463 2,753,307 2,755,010 (1,703) Interest on short—term borrowings ...... 42,109 7,384 7,370 14 Lease payments for debt service ...... 93,481 129,347 126,139 3,208 Other ...... ______675,429 ______827,818 ______884,288 ______(56,470) Total expenditures ...... ______40,676,852 ______43,585,851 ______43,252,777 ______333,074 Excess of revenues over expenditures ...... ______2,639,755 ______4,081,450 ______4,022,889 ______(58,561) OTHER FINANCING SOURCES (USES): Transfers from Component Units ...... 20,400 20,000 21,388 1,388 Transfers to Component Units ...... (16,313) (13,769) (8,458) 5,311 Transfer to Nonmajor Debt Service Fund ...... (3,163) (504,498) (504,472) 26 Transfers and other payments for debt service ...... ______(2,640,679) ______(3,583,183) ______(3,526,689) ______56,494 Total other financing sources (uses) ...... ______(2,639,755) ______(4,081,450) ______(4,018,231) ______63,219 EXCESS OF REVENUES OVER EXPENDITURES AND OTHER FINANCING SOURCES (USES) ...... $______— $______— 4,658 $______4,658 FUND BALANCES AT BEGINNING OF YEAR ...... ______408,078 FUND BALANCES AT END OF YEAR ...... ______$ 412,736 See accompanying notes to financial statements.

B-38 THE CITY OF NEW YORK GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL FOR THE YEAR ENDED JUNE 30, 2003 (in thousands) Better (Worse) Than ______Budget Modified ______Adopted ______Modified ______Actual ______Budget REVENUES: Real estate taxes ...... $ 9,108,826 $10,061,490 $10,062,930 $ 1,440 Sales and use taxes ...... 4,208,700 4,297,900 4,321,464 23,564 Personal income tax ...... 4,898,135 4,475,887 4,492,947 17,060 Income taxes, other ...... 3,073,300 2,631,300 3,137,916 506,616 Other taxes ...... 1,594,535 1,870,635 1,325,222 (545,413) Federal, State and other categorical aid ...... 13,322,982 15,149,663 14,816,057 (333,606) Unrestricted Federal and State aid ...... 790,231 1,674,839 1,442,813 (232,026) Charges for services ...... 1,588,649 1,435,894 1,481,382 45,488 Tobacco settlement ...... 154,353 149,948 149,948 — Investment income ...... 67,480 36,010 43,256 7,246 Other revenues ...... ______1,553,342 ______1,562,547 ______1,367,265 ______(195,282) Total revenues ...... ______40,360,533 ______43,346,113 ______42,641,200 ______(704,913) EXPENDITURES: General government ...... 1,171,887 1,286,622 1,238,442 48,180 Public safety and judicial ...... 5,898,209 6,298,096 6,203,911 94,185 Education ...... 12,354,215 12,756,723 12,672,864 83,859 City University ...... 464,834 478,273 443,654 34,619 Social services ...... 9,053,594 9,498,673 9,321,286 177,387 Environmental protection ...... 1,658,204 1,687,326 1,638,442 48,884 Transportation services ...... 762,691 1,039,505 1,016,155 23,350 Parks, recreation and cultural activities ...... 298,303 297,264 293,182 4,082 Housing ...... 420,275 456,079 437,382 18,697 Health (including payments to HHC) ...... 2,186,804 2,308,587 2,241,495 67,092 Libraries ...... 251,457 337,977 337,639 338 Pensions ...... 1,700,524 1,629,756 1,630,581 (825) Judgments and claims ...... 418,868 612,706 626,916 (14,210) Fringe benefits and other benefit payments ...... 2,217,148 2,604,167 2,606,860 (2,693) Interest on short—term borrowings ...... 65,000 11,534 10,602 932 Lease payments for debt service ...... 154,382 175,661 175,662 (1) Other ...... ______822,273 ______1,150,905 ______1,096,970 ______53,935 Total expenditures ...... ______39,898,668 ______42,629,854 ______41,992,043 ______637,811 Excess of revenues over expenditures ...... ______461,865 ______716,259 ______649,157 ______(67,102) OTHER FINANCING SOURCES (USES): Transfers from Component Units ...... 30,900 22,200 19,920 (2,280) Transfers to Component Units ...... (19,609) (13,367) (13,328) 39 Transfers from Nonmajor Debt Service Funds ...... — 12,700 13,210 510 Transfers to Nonmajor Debt Service Funds ...... (255,300) (225,236) (225,236) — Transfers from Nonmajor Capital Projects Funds ...... 1,625,000 1,599,000 1,670,837 71,837 Transfers and other payments for debt service ...... ______(1,842,856) ______(2,111,556) ______(2,109,622) ______1,934 Total other financing sources (uses) ...... ______(461,865) ______(716,259) ______(644,219) ______72,040 EXCESS OF REVENUES OVER EXPENDITURES AND OTHER FINANCING SOURCES (USES) ...... $______— $ ______— 4,938 $______4,938 FUND BALANCES AT BEGINNING OF YEAR ...... ______403,140 FUND BALANCES AT END OF YEAR ...... $______408,078 See accompanying notes to financial statements.

B-39 THE CITY OF NEW YORK FIDUCIARY FUNDS STATEMENT OF FIDUCIARY NET ASSETS JUNE 30, 2004 (in thousands)

Pension and Other Employee Benefit Agency ______Trust Funds ______Fund ASSETS: Cash and cash equivalents ...... $ 39,285 $ 650,974 Receivables: Member loans ...... 1,679,238 — Investment securities sold ...... 1,822,379 — Accrued interest and dividends ...... 420,775 — Investments: Other short—term investments ...... 2,843,331 — Debt securities ...... 23,003,355 1,053,540 Equity securities ...... 51,101,686 — Mortgages ...... 31 — Guaranteed investment contracts ...... 1,934,795 — Management investment contracts ...... 138,054 — Mutual funds ...... 18,117,456 — Collateral from securities lending transactions ...... 17,681,528 — Due from other funds ...... 1,911 — Other ...... ______65,704 ______10 Total assets ...... ______118,849,528 ______1,704,524 LIABILITIES: Accounts payable and accrued liabilities ...... 476,504 461,898 Payable for investment securities purchased ...... 5,400,317 — Accrued benefits payable ...... 332,412 — Due to other funds ...... 1,911 — Securities lending transactions ...... 17,755,704 — Other ...... ______29,475 ______1,242,626 Total liabilities ...... 23,996,323 1,704,524 NET ASSETS: ______Held in Trust for Benefit Payments ...... $______94,853,205 ______$— See accompanying notes to financial statements.

B-40 THE CITY OF NEW YORK FIDUCIARY FUNDS STATEMENT OF FIDUCIARY NET ASSETS JUNE 30, 2003 (in thousands)

Pension and Other Employee Benefit Agency ______Trust Funds ______Funds ASSETS: Cash and cash equivalents ...... $ 77,630 $ 214,539 Receivables: Member loans ...... 1,664,971 — Investment securities sold ...... 3,288,422 — Accrued interest and dividends ...... 388,111 — Investments: Other short—term investments ...... 3,860,844 — Debt securities ...... 22,541,818 1,103,325 Equity securities ...... 45,235,692 — Mortgages ...... 150 — Guaranteed investment contracts ...... 1,730,254 — Management investment contracts ...... 195,852 — Mutual funds ...... 13,883,631 — Collateral from securities lending transactions ...... 12,202,294 — Due from other funds ...... 1,163 — Other ...... ______51,794 ______10 Total assets ...... ______105,122,626 ______1,317,874 LIABILITIES: Accounts payable and accrued liabilities ...... 404,502 437,844 Payable for investment securities purchased ...... 7,018,063 — Accrued benefits payable ...... 351,889 — Due to other funds ...... 1,163 — Securities lending transactions ...... 12,282,294 — Other ...... ______30,780 ______880,030 Total liabilities ...... ______20,088,691 ______1,317,874 NET ASSETS: Held in Trust for Benefit Payments ...... $______85,033,935 $ ______— See accompanying notes to financial statements.

B-41 THE CITY OF NEW YORK FIDUCIARY FUNDS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FOR THE YEAR ENDED JUNE 30, 2004 (in thousands)

Pension and Other Employee Benefit Trust ______Funds ADDITIONS: Contributions: Member contributions ...... $ 1,146,864 Employer contributions ...... 2,519,578 Other employer contributions ...... ______20,324 Total contributions ...... ______3,686,766 Investment income: Interest income ...... 1,535,674 Dividend income ...... 934,154 Net appreciation in fair value of investments ...... 11,889,189 Less investment expenses ...... ______139,804 Investment income, net ...... ______14,219,213 Securities lending transactions: Securities lending income ...... 124,689 Securities lending fees ...... ______(94,120) Net securities lending income ...... ______30,569 Payments from other funds ...... 3,013 Other ...... ______54,769 Total additions ...... ______17,994,330 DEDUCTIONS: Benefit payments and withdrawals ...... 8,060,744 Payments to other funds ...... 3,013 Other ...... 20,795 Administrative expenses ...... ______90,508 Total deductions ...... ______8,175,060 Increase in plan net assets ...... 9,819,270 NET ASSETS: Held in Trust for Benefit Payments: Beginning of Year ...... ______85,033,935 End of Year ...... $______94,853,205 See accompanying notes to financial statements.

B-42 THE CITY OF NEW YORK FIDUCIARY FUNDS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FOR THE YEAR ENDED JUNE 30, 2003 (in thousands)

Pension and Other Employee Benefit Trust ______Funds ADDITIONS: Contributions: Member contributions ...... $ 1,109,616 Employer contributions ...... 1,760,734 Other employer contributions ...... ______21,263 Total contributions ...... ______2,891,613 Investment income: Interest income ...... 1,587,924 Dividend income ...... 799,154 Net depreciation in fair value of investments ...... (198,672) Less investment expenses ...... ______104,751 Investment income, net ...... ______2,083,655 Securities lending transactions: Securities lending income ...... 137,876 Securities lending fees ...... ______(191,831) Net securities lending loss ...... ______(53,955) Payments from other funds ...... 2,228 Other ...... ______45,392 Total additions ...... ______4,968,933 DEDUCTIONS: Benefit payments and withdrawals ...... 7,802,728 Payments to other funds ...... 2,232 Other ...... 7,888 Administrative expenses ...... ______92,943 Total deductions ...... ______7,905,791 Decrease in plan net assets ...... (2,936,858) NET ASSETS: Held in Trust for Benefit Payments: Beginning of Year ...... ______87,970,793 End of Year ...... ______$ 85,033,935 See accompanying notes to financial statements.

B-43 ,412 25,129 12,810 42,474 3,323 — 3,323 135,691 — 135,691 3,564,455 539,631 4,585,022 69,084 — 2,539 71,623 8——— Housing Development Housing (in thousands) JUNE 30, 2004 COMPONENT UNITS STATEMENT OF NET ASSETS OF NET STATEMENT THE CITY OF NEW YORK THE CITY OF NEW 9—————— 0—————— 6———— 874,536 14,254 — 4,763,939 3,172 3,368,355 31,375 9,055,631 Hospitals Betting October 31, December 31, Development Sewer Component Health and Off-Track Corporation Authority Economic and Water Nonmajor Corporation Corporation 2003 2003 Corporation System Units Total ______.———— .————— .————— : : Total assetsTotal . 3,254,629 37,508 5,037,245 liabilitiesTotal . 6,084,808 1,927,613 342,309 32,375 17,709,977 4,259,693 867,294 955,426 33,333,770 204,145 14,155,796 736,310 22,271,358 : Due within one year . Due in more than one year . 1,020,432 29,369 7,148 1,892 3,250,165 306,982 net assets . Total 235,405 $ 44,255 1,327,016 $ 101,167 5,133 12,565,882 — $ 777,552 1,004,640 691,520 $ 5,129,382 17,871,719 $ 1,260 138,164 $ 3,554,181 1,388,398 $ 130,984 $ 11,062 Capital projects . Debt service . Loans/Security Deposits . Donor restrictions 92,138 . 114,790Operations . 12,81 4,704 — 390,761 — — — 50,642 — 179,106 — 61,260 — 745,917 147,484 Statutory Reserve . 25,12 Construction work-in-progress . 480,93 Property, plant and equipment . Accumulated depreciation . 4,161,736 (2,718,335) 62,227 (47,354) (2,447) 6,711 (4,776,187) 9,653,963 (3,522) 6,931 (5,748,397) 17,358,070 (31,164) (13,327,406) 124,891 31,374,529 Cash and cash equivalents . Investments, including accrued interest . $Other receivables . Mortgage loans and interest receivable, 285,920 net .Inventories . $ 77,381 668,852 17,231 25,816 $ — 262,728 — 700 $ 719,562 — 293,513 — $ 9,381 34,932 3,499,161 315,693 $ 104,660 — 10,929 $ 108,297 840 236 16,65 54,014 $ 444,106 1,385,316 29,918 96 4,338 — 11,284 1,340,334 698,203 — 3,529,919 Accounts payable and accrued liabilities . Accrued interest payable . Deferred revenues . Due to Primary Government . 865,399Other . 12,413Noncurrent Liabilities: — 17,246 — — — 194,328 — 270 5,819 30,931 622,234 63,104 414,183 95,560 1,381 — 13,068 — 31,550 39,083 — 850 12,574 6,568 — 24,331 1,838,891 78,231 451,162 — — 29,239 — 184,492 69,056 1,717 865,615 53,187 Restricted for: Unrestricted (deficit) . 207,613 (13,825) 386,791 365,443 15,266 (128,971) 35,810 868,127 Invested in capital assets,Invested net of related debt . . Due from Primary Government . Restricted cash and investments . Capital assets: 244,867 4,704 904,272 9,139 145,151 1,964,855 157,131 3,430,119 Other . 27,456 — 63,926 40,480 20,366 112,540 7,169 271,937 SSETS ET ASSETS IABILITIES A L N statements. notes to financial See accompanying

B-44 8 47,410 13,352 13,213 — 13,213 132,107 — 132,107 2,892,180 392,978 3,561,632 66,017 — 2,833 88,920 7——— 3,139,460 1,061 42,715 — — 3,183,236 Housing Development Housing (in thousands) JUNE 30, 2003 COMPONENT UNITS STATEMENT OF NET ASSETS OF NET STATEMENT THE CITY OF NEW YORK THE CITY OF NEW 4———— 2—————— 0——— 656,452 15,886 4,596,198 3,875 3,271,440 37,019 8,580,870 Hospitals Betting October 31, December 31, Development Sewer Component Health and Off-Track Corporation Authority Economic and Water Nonmajor Corporation Corporation 2002 2002 Corporation System Units Total ______.————— .————— : : Total assetsTotal . 3,125,984 44,196 4,535,050 liabilitiesTotal . 6,106,744 1,951,694 313,453 28,375 17,054,770 3,822,028 net assets . Total 701,385 $ 973,763 1,174,290 31,881,582 $ 193,949 15,821 $ 13,300,305 713,022 $ 5,132,981 582,880 $ 20,852,994 119,504 $ 3,754,465 $ 118,505 $ 11,028,58 : SSETS Construction work-in-progress . Property, plant and equipment . Accumulated depreciation . 276,47 4,409,297 (2,947,981) 54,495 (38,379) (1,859) 6,860 (4,451,524) 9,173,800 (2,525) 6,637 (5,362,108) 16,633,758 (25,640) (12,830,016) 108,839 30,393,686 Due within one year . Due in more than one year . 1,048,453 32,885 7,379 1,730 3,109,319 64,562 246,335 42,477 107,461 11,894,966 — 527,026 1,057,318 16,940,939 7 1,198,979 Operations . Donor restrictions . 13,35 Capital projects . Debt service . Loans/Security Deposits . 190,856 127,512 20,07 3,586 — — 331,340 — — 46,861 — 203,695 — 45,147 — 707,694 241,303 A Cash and cash equivalents . Investments, including accrued interest . $Other receivables . Mortgage loans and interest receivable, 279,776 net . . $ 76,816 610,320 21,621 $ — 2,873 1,674 — $ 214,085 861,910 233,676 — $ 155,180 37,993 279,742 $ 80,979 8,568 235 $ 474,443 62,336 $ 1,273,878 — 7,511 1,545,391 3,139 593,608 Inventories . Due from Primary Government . Restricted cash and investments . Capital assets: 28,713 361,791Other . — 3,586 30,778 875,552 — — 8,961 18,69 65,602 123,386 2,272,548 58,917 144,998 24,033 3,790,822 122,168 7,224 308,722 Accounts payable and accrued liabilities . Accrued interest payable . Deferred revenues . Due to Primary Government . 856,776Other . 13,580Noncurrent Liabilities: — 13,980 — — — 191,567 — 304 4,982 34,142 641,912 50,145 372,293 63,826 1,547 — 13,119 — 22,560 28,373 — 1,159 19,909 21,503 — 24,915 69,155 1,810,530 231,391 — 34,492 — 168,070 — 1,446 74,184 603,988 56,304 Unrestricted (deficit) . 166,048 (3,651) 381,682 536,783 2,751 147,223 33,506 1,264,342 Invested in capital assets,Invested net of related debt . . Restricted for: SSETS ET IABILITIES A L N statements. notes to financial See accompanying

B-45 1,677 — — 1,677 Housing Development Housing (in thousands) COMPONENT UNITS STATEMENT OF ACTIVITIES OF STATEMENT THE CITY OF NEW YORK THE CITY OF NEW FOR THE YEAR ENDED JUNE 30,THE FOR 2004 Hospitals Betting October 31, December 31, Development and Water Component Health and Off-Track Corporation Authority Economic Nonmajor Corporation Corporation 2003 2003 Corporation Sewer System Units Total ______.———— . $4,557,643 $263,678 $131,957 $2,624,914 $518,998 $2,158,551 $ 33,664 $10,289,405 Change in net assets . 152,726 (10,688) 64,530 (3,599) 18,660 (200,284) 12,479 33,824 Total program revenuesTotal . 4,340,798 250,185General revenues, net . 175,613 369,571 2,590,274 526,481 2,805 1,803,008 20,874 45,172 31,041 9,731,531 11,177 155,259 971 591,698 Charges for ServicesCharges . Operating Grants and Contributions . Capital Grants, and other . Contributions 3,819,018 305,587 program revenuesNet (expenses) . 216,193 250,185 incomeInvestment . (216,845)Unrestricted Federal and State aid . 175,613 — — (13,493) 4,256 645,200 43,656Net assets—ending . — 165,746 — 222 $1,327,016 1,473,752 (34,640) 1,773,133 471,322 $ 20,874 5,133 57,327 7,483 29,797 303,408 $777,552 16,836 6,858,692 (355,543) $5,129,382 29,875 — 11,508 $138,164 1,680 $3,554,181 15,375 (557,874) 86,948 — 1,036,173 $130,984 $11,062,412 1,836,666 600 131,416 Other . 365,315 2,583 — 14,205 7,820 68,311 371 458,605 Net assets—beginning . 1,174,290 15,821 713,022 5,132,981 119,504 3,754,465 118,505 11,028,588 Expenses Revenues: Program General Revenues: statements. notes to financial See accompanying

B-46 2,139 — — 2,139 Housing Development Housing (in thousands) COMPONENT UNITS STATEMENT OF ACTIVITIES OF STATEMENT THE CITY OF NEW YORK THE CITY OF NEW FOR THE YEAR ENDED JUNE 30,THE FOR 2003 210,439 — — 524,274 275,726 7,233 10,611 1,028,283 Hospitals Betting October 31, December 31, Development and Water Component Health and Off-Track Corporation Authority Economic Nonmajor Corporation Corporation 2002 2002 Corporation Sewer System Units Total ______.———— . $ 4,519,855 $ 245,282 $ 135,056 $ 2,520,723 $ 541,163 $ 1,954,316 $ 33,448 $ 9,949,843 Change in net assets . (121,213) 671 45,410 167,264 (77,925) (73,111) 6,172 (52,732) Total program revenuesTotal . 4,152,916 241,447General revenues, net . 154,721 245,726 2,639,428 456,841 4,506 1,719,153 25,745 38,607 48,559 9,403,113 6,397 162,052 1,013 493,998 Charges for ServicesCharges . Operating Grants and Contributions . Capital Grants, and other Contributions . . 3,552,738 389,739 program revenuesNet (expenses) . 241,447 incomeInvestment . (366,939)Unrestricted Federal and State aid . 154,721 — 11,044 (3,835) 627,107Net assets—ending . 19,665 — 163,319 315 $ 1,174,290 1,488,047 1,711,920 118,705 $ 25,745 15,821 17,796 (84,322) 27,996 $ 713,022 33,432 (235,163) 6,479,248 $ 5,132,981 — $ 119,504 1,937 5,159 $ 3,754,465 (546,730) 96,236 $ — 118,505 $ 11,028,588 1,895,582 645 169,354 Other . 234,682 4,191 — 15,127 2,321 65,816 368 322,505 Net assets—beginning . 1,295,503 15,150 667,612 4,965,717 197,429 3,827,576 112,333 11,081,320 Expenses Revenues: Program General Revenues: statements. notes to financial See accompanying

B-47 THE CITY OF NEW YORK NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 and 2003

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying basic financial statements of The City of New York (City or primary government) are presented in conformity with generally accepted accounting principles (GAAP) for governments in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB). The amounts shown in the “Primary Government” and “Component Units” columns of the accompanying government-wide financial statements are only presented to facilitate financial analysis and are not the equivalent of consolidated financial statements. The following is a summary of the significant accounting policies and reporting practices of the City:

1. Reporting Entity

The City of New York is a municipal corporation governed by the Mayor and the City Council. The City’s operations also include those normally performed at the county level and, accordingly, transactions applicable to the operations of the five counties which comprise the City are included in these financial statements. The financial reporting entity consists of the primary government including the Department of Education and the community colleges of the City University of New York, other organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization’s governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. Most component units are included in the financial reporting entity by discrete presentation. Some component units, despite being legally separate from the primary government, are so integrated with the primary government, that they are in substance part of the primary government. These component units are blended with the primary government. The New York City Transit Authority is an affiliated agency of the Metropolitan Transportation Authority of the State of New York which is a component unit of New York State and is excluded from the City’s financial reporting entity. Blended Component Units

These component units, although legally separate, all provide services exclusively to the City and thus are reported as if they were part of the primary government. They include the following: Municipal Assistance Corporation for The City Of New York (MAC). MAC is a corporate governmental agency and instrumentality of the State constituting a public benefit corporation. MAC was created in 1975 by the Municipal Assistance Corporation For The City of New York Act (Act) for purposes of providing financing assistance including funding for certain oversight of the City’s financial activities. Pursuant to the Act, MAC is empowered to issue and sell bonds and notes for the purpose of paying or loaning the proceeds of such sales to the City and to exchange its obligations for those of the City. MAC is no longer authorized to issue bonds for new funding purposes. MAC continues to be authorized to issue obligations to renew or refund outstanding obligations without limitation as to amount. In a case filed by the Local Government Assistance Corporation, the New York Court of Appeals recently upheld as constitutional New York State’s legislation that allows the City to refinance MAC’s debt. There are still outstanding issues to be resolved pending the implementation of any refinancing. The plan of refinancing MAC’s debt is designed to assist the City in managing and reducing its debt service obligation to MAC. MAC has no taxing power. All outstanding bonds issued by MAC are general obligations of MAC and do not constitute an enforceable obligation or a debt of either the City or the State and neither the City nor the State is liable thereon. Neither the City nor a creditor

B-48 NOTES TO FINANCIAL STATEMENTS, Continued

of the City has any claim to MAC’s revenues and assets. Debt service requirements and operating expenses are funded by allocations from the State’s collection of sales taxes (imposed by the State within the City at rates formerly imposed by the City), the stock transfer tax, and certain per capita aid subject in each case to appropriation by the State Legislature. Net collections of sales taxes and per capita aid are returned to the City by the State after MAC debt service requirements are met and subject to a TFA claim on sales taxes—see New York City Transitional Finance Authority (TFA). The MAC bond resolutions provide for liens by bondholders on certain monies received by MAC from the State. New York City Transitional Finance Authority (TFA). TFA, a corporate governmental agency constituting a public benefit corporation and instrumentality of the State of New York was created in 1997 to assist the City in funding its capital program, the purpose of which is to maintain, rebuild, and expand the infrastructure of the City. TFA has no taxing power. All outstanding bonds issued by TFA are general obligations of TFA and do not constitute an enforceable obligation or a debt of either the City or the State and neither the City nor the State is liable thereon. Neither the City nor a creditor of the City has any claim to TFA’s revenues and assets. Debt service requirements and operating expenses are funded by allocations from the State’s collection of personal income taxes (imposed by the City and collected by the State) and, under certain circumstances, sales taxes. Sales taxes are only available to TFA after such amounts required by MAC are deducted and if the amounts of personal income tax revenues fall below statutorily specified debt service coverage levels. Net collections of personal income taxes not required by TFA are paid to the City by TFA. New York City Samurai Funding Corporation (SFC). SFC was created in 1992 and is a special purpose governmental not- for-profit entity, created to issue Yen-denominated bonds. The City is not liable for any obligations of SFC under the bonds, nor is any bond to be considered a debt of the City. The members, directors, and officers of SFC are all elected officials or employees of the City. SFC issued Yen-denominated bonds to investors on May 27, 1993 and simultaneously bought general obligation bonds from the City. Such bonds require the City to make floating rate interest and principal payments in U.S. dollars to SFC. SFC entered into currency and interest rate exchange agreements to swap the City’s payments into fixed rate Yen which are used to pay SFC’s bondholders. These agreements limit the City’s currency and exchange rate change exposure. The proceeds from the City’s bonds sold to SFC were used for housing and economic development projects. SFC paid its outstanding obligations during fiscal year 2003 and had no remaining assets or liabilities at June 30, 2003. SFC, having no continuing operating activities was dissolved on April 26, 2004 in accordance with the provisions of the New York Not-For-Profit Corporation Law. TSASC, Inc. (TSASC). TSASC is a special purpose, local development corporation organized in 1999 under the laws of the State of New York. TSASC is an instrumentality of the City, but is a separate legal entity from the City. Pursuant to a purchase and sale agreement with the City, the City sold to TSASC all of its future right, title, and interest in the tobacco settlement revenues under the Master Settlement Agreement and the Decree and Final Judgment. This settlement agreement resolved cigarette smoking-related litigation between the settling states and participating manufacturers, released the participating manufacturers from past and present smoking-related claims, and provides for a continuing release of future smoking-related claims in exchange for certain payments to be made to the settling states, as well as certain tobacco advertising and marketing restrictions, among other things. The City is allocated a share of the tobacco settlement revenues received by New York State. The purchase price of the City’s future right, title, and interest in the tobacco settlement revenues has been financed by the proceeds of TSASC’s initial bond issuance and the net proceeds from future bond issues. In addition, the City is entitled to receive all amounts required to be distributed after payment of debt service, operating expenses, and certain other costs as set forth in the Indenture. These payments are subordinate to payments on the bonds and payment of certain other costs specified in the Indenture. See Note D.5. for information about an event that occurred in fiscal year 2003 that affects the ability of TSASC to issue debt and make distributions to the City.

New York City Educational Construction Fund (ECF). ECF was created in 1967 as a corporate governmental agency of the State of New York, constituting a public benefit corporation. ECF was established to receive and administer money for the construction of the school related portion of combined occupancy structures. ECF was created by the Education Law of the State and is authorized to issue bonds, notes, or other obligations to finance the construction and improvement of elementary and secondary school buildings within the City.

B-49 NOTES TO FINANCIAL STATEMENTS, Continued

New York City School Construction Authority (SCA). SCA is a public benefit corporation created by the New York State Legislature in 1988. SCA’s responsibilities as defined in the enabling legislation are the design, construction, reconstruction, improvement, rehabilitation and repair of the City’s public schools. SCA is governed by a three-member Board of Trustees, all of whom are appointed by the Mayor which includes the Schools Chancellor of the City who serves as the Chairman. SCA’s operations are almost entirely funded by appropriations made by the City and are guided by five-year capital plans, developed by the Department of Education of the City. As SCA represents a pass-through entity, in existence for the sole purpose of capital projects, all expenditures are capitalized. Upon substantial completion of the capital projects, the assets are transferred to the City. Discretely Presented Component Units All discretely presented component units are legally separate from the primary government. These entities are reported as discretely presented component units because the City appoints a majority of these organizations’ boards, is able to impose its will on them, or a financial benefit/burden situation exists. The component units column in the government-wide financial statements include the financial data of these entities, which are reported in a separate column to emphasize that they are legally separate from the City. They include the following: New York City Health and Hospitals Corporation (HHC). HHC, a public benefit corporation, assumed responsibility for the operation of the City’s municipal hospital system in 1970. HHC’s financial statements include the accounts of HHC and its wholly- owned subsidiaries, MetroPlus Health Plan, Inc. and HHC Capital Corporation, and a closely affiliated not-for-profit corporation, The HHC Foundation of New York City, Inc. HHC mainly provides, on behalf of the City, comprehensive medical and mental health services to City residents regardless of ability to pay. Funds appropriated from the City are payments, either directly or indirectly, for services rendered by HHC. The City pays for patient care rendered to prisoners, uniformed City employees, and various discretely funded facility-specific programs. In addition, the City has paid HHC’s costs for settlements of claims for medical malpractice, negligence, other torts, and alleged breach of contracts, as well as other HHC costs including interest on City debt which funded HHC capital acquisitions, interest on New York State Housing Finance Agency debt on HHC assets acquired through lease purchase agreements prior to April 1, 1993, and interest on Dormitory Authority of the State of New York debt on assets acquired through lease purchase agreements. From 1993 through 2001, HHC reimbursed the City for these debt service payments. Since 2002, HHC no longer reimburses the City for debt service but instead, reimburses the City for medical malpractice settlements it pays on behalf of HHC, up to an agreed upon amount to be negotiated each year. HHC records both a revenue and an expense in an amount equal to expenditures made on its behalf by the City. New York City Off-Track Betting Corporation (OTB). OTB was established in 1970 as a public benefit corporation to operate a system of off-track betting in the City. OTB earns: (i) revenues on its betting operations ranging between 15% and 31% of wagers handled, depending on the type of wager; (ii) a 5% surcharge and surcharge breakage on pari-mutuel winnings; (iii) a 1% capital acquisition surcharge on multiple, exotic, and super exotic wagering pools; (iv) breakage, the revenue resulting from the rounding down of winning payoffs; (v) uncashed pari-mutual tickets which represent winning tickets outstanding; and (vi) 50% of all out- of-state and 45% of all Finger Lakes simulcasting surcharge revenues. Pursuant to State law, OTB: (i) distributes various portions of the surcharge and surcharge breakage to other localities in the State; (ii) allocates various percentages of wagers handled to the racing industry; (iii) allocates various percentages of wagers handled and breakage together with all uncashed parimutuel tickets to the State; (iv) allocates the 1% surcharge on multiple, exotic, and super exotic wagering pools for the financing of capital acquisitions; and (v) pays regulatory fees (.39% of OTB’s gross handle) to the Racing and Wagering Board. All remaining net revenue is distributable to the City. In addition, OTB acts as a collection agent for the City with respect to surcharge and surcharge breakage due from other community off-track betting corporations. Jay Street Development Corporation (JSDC). JSDC is a local development corporation organized by the City in 2000 under the not-for-profit corporation law of the State of New York. JSDC is an instrumentality of the City, but is a separate legal entity from the City. JSDC has no taxing power. Bonds issued by JSDC do not constitute debt of the State or the City and neither the State nor the City is liable on them. Bond issuances are being used to fund the costs of the design, construction, and furnishing of a courthouse (Courts Facility) in Brooklyn. The City has leased the Courts Facility from JSDC and the rental payments will fund debt service requirements, redemption premiums (if any), financing costs, administrative expenses, and certain additional amounts determined

B-50 NOTES TO FINANCIAL STATEMENTS, Continued

by JSDC as necessary for this project. See Note E.2. for information about an event that occurred subsequent to June 30, 2004, whereby the City exercised its option under the Ground Lease to purchase the Landlord’s undivided interest in the land appurtenant to the Court Unit. New York City Housing Development Corporation (HDC). HDC, a corporate governmental agency constituting a public benefit corporation and instrumentality of the State of New York was established in 1971 to encourage private housing development by providing low interest mortgage loans. The combined financial statements include the accounts of HDC and its discretely presented component units: Housing Assistance Corporation, Housing New York Corporation, and the New York City Residential Mortgage Insurance Corporation. As of November 3, 2003, the Housing New York Corporation has become an inactive subsidiary of HDC. HDC finances multiple dwelling mortgages substantially through issuance of HDC bonds and notes. The bonds and notes of HDC are not debts of either the State or the City. HDC has a fiscal year ending October 31. HDC operates in a manner similar to a private business that includes activities such as financing of real estate development, investment banking, commercial lending, and consulting. HDC is supported by various program fees that may include: application fees, commitment fees, financing fees and mortgage insurance fees, and servicing fees on certain of its mortgage loans and for loans serviced for the City. Mortgage loan earnings represent HDC’s major source of operating revenue. HDC maintains separate accounts for each program to control and manage money for particular purposes or to demonstrate that it is properly using specific resources.

New York City Housing Authority (HA). HA is a public benefit corporation chartered in 1934 under the New York State Public Housing Law. HA develops, constructs, manages, and maintains low cost housing for eligible low income families in the City. HA also maintains a leased housing program which provides housing assistance payments to families. Substantial operating deficits (the difference between operating revenues and expenses) result from the essential services that HA provides, and such operating deficits will continue in the foreseeable future. To meet the funding requirements of these operating deficits, HA receives subsidies from: (a) the Federal government primarily the U.S. Department of Housing and Urban Development in the form of annual grants for operating assistance, debt service payments, contributions for capital and reimbursement of expenditures incurred for certain Federal housing programs; (b) New York State in the form of operating assistance, reimbursement of certain expenses, and debt service payments; and (c) New York City in the form of operating assistance and debt service payments. Subsidies are established through budgetary procedures which establish amounts to be funded by the grantor agencies. Projected operating surplus or deficit amounts are budgeted on an annual basis and approved by the grantor agency. Capital project budgets are submitted at various times during the year. HA has a calendar year-end. New York City Industrial Development Agency (IDA). IDA is a public benefit corporation established in 1974 to actively promote, retain, attract, encourage, and develop an economically sound commerce and industry base to prevent unemployment and economic deterioration in the City. IDA is governed by a Board of Directors, which establishes official policies and reviews and approves requests for financing assistance. Its membership is prescribed by statute and includes public officials and private business leaders. New York City Economic Development Corporation (EDC). EDC is a local development corporation organized in 1966 according to the not-for-profit corporation law of the State of New York. EDC’s financial statements include the accounts of EDC and its affiliates, Metropolitan Business Assistance, Ltd. and Apple Industrial Development Corporation. EDC renders a variety of services and administers certain economic development programs on behalf of the City relating to attraction, retention, and expansion of commerce and industry in the City. These services and programs include encouragement of construction, acquisition, rehabilitation, and improvement of commercial and industrial enterprises within the City, and provide loan guarantees or grants to qualifying business enterprises as a means of helping to create and retain employment therein. New York City Marketing Development Corporation (MDC). MDC is a local development corporation organized in 2003 under the not-for-profit corporation law of the State of New York. MDC is the City’s central office for sponsorship, licensing, brand management, media management, advertising, and marketing. MDC’s goals are to generate revenue for the City without raising taxes; support City agencies and important City initiatives; and promote the City for economic development, business prosperity, and growth in employment and tourism. Business Relocation Assistance Corporation (BRAC). BRAC is a not-for-profit corporation incorporated in 1981 according to the not-for-profit corporation law of the State of New York for the purpose of implementing and administering the Relocation Incentive Program (RIP) and other related programs. BRAC provides relocation assistance to qualifying commercial and manufacturing firms moving within The City of New York.

B-51 NOTES TO FINANCIAL STATEMENTS, Continued

The funds for RIP are provided by owners/developers of certain residential projects which cause the relocation of commercial and manufacturing businesses previously located at those sites. These funds consist of conversion contributions or escrow payments mandated by the City’s Zoning Resolution for this type of development. The ability of BRAC to extract fees for residential conversion ended as of January 1, 1998 per the Zoning Resolution. All conversion contributions received by BRAC are restricted for the use of administering industrial retention/relocation programs consistent with the Zoning Resolution. One such program, the Industrial Relocation Grant Program provides grants up to $30,000 to eligible New York City manufacturing firms to defray their moving costs. Grants are awarded after a firm completes its relocation. This program will continue to operate only with the current accumulated net assets now available. Brooklyn Navy Yard Development Corporation (BNYDC). BNYDC was organized in 1966 as a not-for-profit corporation according to the not-for-profit corporation law of the State of New York. The primary purpose of BNYDC is to provide economic rehabilitation in Brooklyn, to revitalize the economy, and create job opportunities. In 1971, BNYDC leased the Brooklyn Navy Yard from the City for the purpose of rehabilitating it and attracting new businesses and industry to the area. The Mayor appoints the majority of the members of the Board of Directors. New York City Water Board (Water Board ) and New York City Municipal Water Finance Authority (Water Authority). The Water and Sewer System (NYW), consisting of two legally separate and independent entities, the Water Board and the Water Authority, was established in 1985. NYW provides for water supply and distribution, and sewage collection, treatment, and disposal for the City. The Water Authority was established to issue debt to finance the cost of capital improvements to the water distribution and sewage collection system, and to refund any and all outstanding bonds and general obligation bonds of the City issued for water and sewer purposes. The Water Board was established to lease the water distribution and sewage collection system from the City and to establish and collect rates, fees, rents, and other charges for the use of, or for services furnished, rendered, or made available by the water distribution and sewage collection system to produce cash sufficient to pay debt service on the Water Authority’s bonds and to place NYW on a self-sustaining basis.

Note: These organizations publish separate annual financial statements which are available at: Office of the Comptroller, Bureau of Accountancy—Room 808, 1 Centre Street, New York, New York 10007.

2. Basis of Presentation

Government-wide Statements: The government-wide financial statements (i.e., the statement of net assets and the statement of activities), display information about the primary government and its component units. These statements include the financial activities of the overall government except for fiduciary activities. For the most part, eliminations of internal activity have been made in these statements. The primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. All of the activities of the City as primary government are governmental activities. The statement of activities presents a comparison between direct expenses and program revenues for each function of the City’s governmental activities. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include: (i) charges for services such as rental revenue from operating leases on markets, ports, and terminals and (ii) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or program. Taxes and other revenues not properly included among program revenues are reported as general revenues. Fund Financial Statements: The fund financial statements provide information about the City’s funds, including fiduciary funds and blended component units. Separate statements for the governmental and fiduciary fund categories are presented. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. The City has reevaluated the financial reporting as City guaranteed debt service funds of certain of its financial interactions with: New York State Housing Finance Agency (HFA), New York State Dormitory Authority (DASNY), and New York State Urban Development Corporation and concludes that the preferable accounting treatment is to no longer include these funds in the City’s financial reporting entity. In addition, it has been determined that City University Construction Fund (CUCF) is reported as part of the reporting entity of the State of New York and accordingly has been removed from the reporting entity of the City. The FY’03 beginning fund balances were restated to $(530.8) million, an increase to the fund deficit of the nonmajor governmental funds by $236.4 million of fund balances relating to HFA, CUCF, and DASNY, respectively.

B-52 NOTES TO FINANCIAL STATEMENTS, Continued

The City uses funds to report on its financial position and the results of its operations. Fund accounting is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain government functions or activities. A fund is a separate accounting entity with a self-balancing set of accounts. Funds are classified into three categories: governmental, fiduciary, and proprietary. Except for proprietary (the only organizations that would be categorized as proprietary funds are reported as component units), each category, in turn, is divided into separate “fund types.” The City reports the following major governmental funds: General Fund. This is the general operating fund of the City. Substantially all tax revenues, Federal and State aid (except aid for capital projects), and other operating revenues are accounted for in the General Fund. This fund also accounts for expenditures and transfers as appropriated in the Expense Budget, which provides for the City’s day-to-day operations, including transfers to Debt Service Funds for payment of long-term liabilities. New York City Capital Projects Fund. This fund is used to record all revenues, expenditures, assets, and liabilities associated with City capital projects. It accounts for resources used to construct or acquire fixed assets and make capital improvements. Resources of the New York City Capital Projects Fund are derived principally from proceeds of City bond issues, payments from the Water Authority, and from Federal, State, and other aid. General Debt Service Fund. This fund, required by State legislation on January 1, 1979 is administered and maintained by the State Comptroller into which payments of real estate taxes and other revenues are deposited in advance of debt service payment dates. Debt service on all City notes and bonds is paid from this fund. Additionally, the City reports the following fund types: Fiduciary Funds

The Fiduciary Funds are used to account for assets and activities when a governmental unit is functioning either as a trustee or an agent for another party. They include the following: The Pension and Other Employee Benefit Trust Funds account for the operations of: • New York City Employees’ Retirement System (NYCERS) • New York City Teachers’ Retirement System—Qualified Pension Plan (TRS) • New York City Board of Education Retirement System—Qualified Pension Plan (BERS) • New York City Police Pension Fund (POLICE) • New York City Fire Pension Fund (FIRE) • New York Police Department Police Officers’ Variable Supplements Fund (POVSF) • New York Police Department Police Superior Officers’ Variable Supplements Fund (PSOVSF) • New York Fire Department Firefighters’ Variable Supplements Fund (FFVSF) • New York Fire Department Fire Officers’ Variable Supplements Fund (FOVSF) • Transit Police Officers’ Variable Supplements Fund (TPOVSF) • Transit Police Superior Officers’ Variable Supplements Fund (TPSOVSF) • Housing Police Officers’ Variable Supplements Fund (HPOVSF) • Housing Police Superior Officers’ Variable Supplements Fund (HPSOVSF) • Correction Officers’ Variable Supplements Fund (COVSF) • Deferred Compensation Plan for Employees of The City of New York and Related Agencies and Instrumentalities (DCP/457 Plan) • Deferred Compensation Plan for Employees of The City of New York and Related Agencies and Instrumentalities (DCP/401(k) Plan)

Note: These organizations publish separate annual financial statements which are available at: Office of the Comptroller, Bureau of Accountancy—Room 808, 1 Centre Street, New York, New York 10007. These funds use the accrual basis of accounting and a measurement focus on the periodic determination of additions, deductions, and net assets held in trust for benefit payments.

B-53 NOTES TO FINANCIAL STATEMENTS, Continued

The Agency Funds account for miscellaneous assets held by the City for other funds, governmental units, and individuals. The Agency Funds are custodial in nature and do not involve measurement of results of operations. Discretely Presented Component Units

The discretely presented component units consist of HHC, OTB, HDC, HA, EDC, NYW and the nonmajor component units. These activities are accounted for in a manner similar to private business enterprises, in which the focus is on the periodic determination of revenues, expenses, and net income. New Accounting Standards Adopted

In fiscal year 2004, the City adopted two new statements and a Technical Bulletin of financial accounting standards issued by the Governmental Accounting Standards Board (GASB): — Statement No. 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries — Statement No. 44 Economic Condition Reporting: The Statistical Section, an amendment of NCGA Statement 1

— Technical Bulletin No. 2004-1 Tobacco Settlement Recognition and Financial Reporting Entity Issues Statement No. 42 establishes accounting and reporting standards for the impairment of capital assets as its primary objective since current standards do not have a specific requirement to reduce the carrying value of a capital asset other than through the application of depreciation. The Statement improves financial reporting because it requires the City to report the effects of capital asset impairments in its financial statements when they occur rather than as a part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset. Users of the City’s financial statements will better understand when impairments have occurred and what their financial impact is on the City. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. Another objective of Statement No. 42 is to establish and clarify guidance for accounting for insurance recoveries which applies to all such recoveries, not just those associated with impairment of capital assets, for all funds and activities since authoritative guidance for insurance recoveries did not heretofore exist for governmental funds. The Statement also enhances comparability of the City’s financial statements with the governmental sector by requiring all the entities to account for insurance recoveries in the same manner. There was no impact on the City’s financial statements as a result of the implementation of Statment No. 42. Statement No. 44 amends the portions of NCGA Statement 1, Governmental Accounting and Financial Reporting Principles that guide the preparation of the statistical section whose objectives are to provide financial statement users with additional historical perspective, context, and detail to assist in using the information in the financial statements, notes to the financial statements, and required supplementary information to understand and assess the City’s economic condition. This Statement improves the understandability and usefulness of statistical section information by addressing the comparability problems that have developed in practice and by adding information from the new financial reporting model for state and local governments required by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. Statistical section information is presented in the following five categories for the most recent ten years as established by Statement No. 44: • Financial trends information is intended to assist users in understanding and assessing how the City’s financial position has changed over time. • Revenue capacity information is intended to assist users in understanding and assessing the factors affecting the City’s ability to generate its own-source revenues. • Debt capacity information is intended to assist users in understanding and assessing the City’s debt burden and its ability to issue additional debt.

• Demographic and economic information is intended: (i) to assist users in understanding the socioeconomic environment within which the City operates and (ii) to provide information that facilitates comparisons of financial statement information over time and among governments. • Operating information is intended to provide contextual information about the City’s operations and resources to assist readers in using financial statement information to understand and assess the City’s economic condition.

B-54 NOTES TO FINANCIAL STATEMENTS, Continued

Technical Bulletin No. 2004-1 clarifies guidance on whether TSASC that was created to obtain the rights to all of the City’s future right, title, and interest in the tobacco settlement revenues under the Master Settlement Agreement (MSA) is a component unit of the City that created it. In addition, the Technical Bulletin clarifies recognition guidance for these transactions and for payments made to the City pursuant to MSA with the major tobacco companies. There was no change to the reporting entity of the City and there was no impact on the City’s financial statements as a result of the implementation of Technical Bulletin No. 2004-1.

3. Basis of Accounting

The basis of accounting determines when transactions are reported on the financial statements. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the City either gives or receives value without directly receiving or giving equal value in exchange, include sales and income taxes, property taxes, grants, entitlements, and donations which are recorded on the accrual basis of accounting. Revenues from sales and income taxes are recognized when the underlying exchange transaction takes place. Revenues from property tax are recognized in the fiscal year for which the taxes are levied. Revenues from grants, entitlements, and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental fund types use the flow of current financial resources measurement focus. This focus is on the determination of, and changes in financial position, and generally only current assets and current liabilities are included on the balance sheet. These funds use the modified accrual basis of accounting, whereby revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the fiscal period. Revenues from taxes are generally considered available if received within two months after the fiscal year-end. Revenues from categorical and other grants are generally considered available if received within one year after the fiscal year-end. Expenditures are recorded when the related liability is incurred and payment is due, except for principal and interest on long-term debt and certain estimated liabilities which are recorded only when payment is due. The measurement focus of the Pension and Other Employee Benefit Trust Funds is on the flow of economic resources. This focus emphasizes the determination of net income, changes in net assets, and financial position. With this measurement focus, all assets and liabilities associated with the operation of these funds are included on the balance sheet. These funds use the accrual basis of accounting whereby revenues are recognized in the accounting period in which they are earned, and expenses are recognized in the period incurred. The Pension Trust Funds’ contributions from members are recorded when the employer makes payroll deductions from Plan members. Employer contributions are recognized when due. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plans. In accordance with GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Activities That Use Proprietary Fund Accounting, the discretely presented component units have elected not to apply Financial Accounting Standards Board statements and interpretations issued after November 30, 1989. The Agency Funds use the accrual basis of accounting and do not measure the results of operations.

4. Encumbrances

Encumbrance accounting, under which purchase orders, contracts, and other commitments for expenditures are recorded to reflect the use of the applicable spending appropriations, is used by the General Fund during the fiscal year to control expenditures. The cost of those goods received and services rendered on or before June 30 are recognized as expenditures. Encumbrances not resulting in expenditures by year-end, lapse.

B-55 NOTES TO FINANCIAL STATEMENTS, Continued

5. Cash and Investments

The City considers all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased, to be cash equivalents. Cash and cash equivalents include compensating balances maintained with certain banks in lieu of payments for services rendered. The average compensating balances maintained during fiscal years 2004 and 2003 were approximately $2.711 billion and $1.485 billion, respectively. Most investments are reported in the balance sheet at fair value. Investment income, including changes in the fair value of investments, is reported in operations. Investments in fixed income securities are recorded at fair value. Securities purchased pursuant to agreements to resell are carried at the contract price, exclusive of interest, at which the securities will be resold. Investments of the Pension and Other Employee Benefit Trust Funds are reported at fair value. Investments are stated at the last reported sales price on a national securities exchange on the last business day of the fiscal year.

A description of the City’s securities lending activities for the Pension and Other Employee Benefit Trust Funds in fiscal years 2004 and 2003 is included in Deposits and Investments (see Note D.1.).

6. Inventories

Inventories on hand at June 30, 2004 and 2003 (estimated at $229 million and $214 million, respectively, based on average cost) have been reported on the governmental-wide financial statement of net assets. Inventories are recorded as expenditures in governmental funds at the time of purchase and accordingly, have not been reported on the governmental funds balance sheet.

7. Restricted Cash and Investments

Certain proceeds of component unit bonds, as well as certain resources set aside for bond repayment, are classified as restricted cash and investments on the balance sheet because their use is limited by applicable bond covenants.

8. Capital Assets

Capital assets and improvements include substantially all land, buildings, equipment, water distribution and sewage collection system, and other elements of the City’s infrastructure having a minimum useful life of five years, having a cost of more than $35,000, and having been appropriated in the Capital Budget (see Note C.1.). Capital assets which are used for general governmental purposes and are not available for expenditure are accounted for and reported in the government-wide financial statements. These statements also contain the City’s infrastructure elements that are now required to be capitalized under GAAP. Infrastructure elements include the roads, bridges, curbs and gutters, streets and sidewalks, park land and improvements, and tunnels. The capital assets of the water distribution and sewage collection system are recorded in the Water and Sewer System component unit financial statements under a lease agreement between the City and the Water Board. Capital assets are generally stated at historical cost, or at estimated historical cost based on appraisals or on other acceptable methods when historical cost is not available. Donated capital assets are stated at their fair market value as of the date of the donation. Capital leases are classified as capital assets in amounts equal to the lesser of the fair market value or the present value of net minimum lease payments at the inception of the lease (see Note D.3.). Accumulated depreciation and amortization are reported as reductions of capital assets. Depreciation is computed using the straight- line method based upon estimated useful lives of 40 to 50 years for buildings; 5 to 35 years for equipment; and 15 to 50 years for infrastructure. Capital lease assets and leasehold improvements are amortized over the term of the lease or the life of the asset, whichever is less.

B-56 NOTES TO FINANCIAL STATEMENTS, Continued

9. Allowance for Uncollectible Mortgage Loans

Mortgage loans and interest receivable in the Debt Service Funds are net of an allowance for uncollectible amounts of $695.5 million and $753.5 million for fiscal years 2004 and 2003, respectively. The allowance is composed of the balance of first mortgages one or more years in arrears and the balance of refinanced mortgages where payments to the City are not expected to be completed for approximately 25 to 30 years.

10. Vacation and Sick Leave

Earned vacation and sick leave is recorded as an expenditure in the period when it is payable from current financial resources in the fund financial statements. The estimated value of vacation leave earned by employees which may be used in subsequent years or earned vacation and sick leave paid upon termination or retirement, and therefore payable from future resources, is recorded as a liability in the government-wide financial statements.

11. Treasury Obligations

Bonds payable included in the government-wide financial statements and investments in the Debt Service Funds are reported net of treasury obligations. Treasury obligations represent City bonds held as investments of the Debt Service Funds which are offset and reported as if these bonds had been redeemed.

12. Judgments and Claims

The City is uninsured with respect to risks including, but not limited to, property damage, personal injury, and workers’ compensation. In the fund financial statements, expenditures for judgments and claims (other than workers’ compensation and condemnation proceedings) are recorded on the basis of settlements reached or judgments entered within the current fiscal year. Expenditures for workers’ compensation are recorded when paid. Settlements relating to condemnation proceedings are reported when the liability is estimable. In the government-wide financial statements, the estimated liability for all judgments and claims is recorded as a liability.

13. Long-term Liabilities

For long-term liabilities, only that portion expected to be financed from expendable available financial resources is reported as a fund liability of a governmental fund. All long-term liabilities are reported in the government-wide financial statement of net assets. Long-term liabilities expected to be financed from discretely presented component unit operations are accounted for in those component unit financial statements.

14. Derivatives Certain disclosures have been made for the following derivatives contracted during fiscal years 2004 and 2003 which are reported at fair value on the government-wide statement of net assets to include disclosure of the objective for entering into the derivative and the derivative’s terms, fair value, and risk exposures.

B-57 NOTES TO FINANCIAL STATEMENTS, Continued

Swap Transaction Summary

In an effort to lower its borrowing costs over the life of its bonds and to diversify its existing derivatives portfolio, the City has entered into Interest Rate Exchange Agreements (swaps) and sold options related to these swaps. As of June 30, 2004 and 2003, the total notional amount of swaps and swaptions entered into by the City was $2.476 billion and $1.286 billion, respectively. The total marked to market value of the City’s swaps and swaptions for fiscal years 2004 and 2003 was approximately $(28.3) million and $(93.5) million, respectively, which were reported on the government-wide statement of net assets. The table includes the significant terms and marked to market values for each of the City’s individual swap transactions.

______Transaction Number ______1 ______2 ______3-4 ______5-8 ______9 ______10 ______11 Corresponding Bond Series . . . . 2004 A and B 2004 F 1998F, 1998G, 2003 C, D, & E 2003 G-4, G-5, 2003 G-2, G-3, 1993 B, 1994 H-7, 1998H, 1999A, G-6, and H-3 and H-2 1995 B-11 and B-12, 1999F, 2001D, 2001 H-M, 2002 A-9, 2001G, 2002G, A-10 and A-11, 2003 F 2003A, 2003C-1, and 2003G-1 Swap Type Synthetic Fixed Total Return Swaption to Synthetic Fixed Synthetic Fixed Synthetic Fixed Basis Swap Floating Notional Amount ...... $350,000,000 $500,000,000 $350,000,000 $400,000,000 $135,050,000 $80,000,000 $660,795,000 Up-front Cash Payment to the City ...... $ — $ — $ — $ — $ — $ — $20,000,000 Effective Date ...... 7/14/03 12/18/03 8/1/07 11/13/02 1/22/03 1/22/03 3/14/03 Termination Date ...... 8/1/31 12/15/11 8/1/24 8/1/20 8/1/26 8/1/14 3/15/29 Final Bond Maturity ...... 8/1/31 12/15/33 8/1/24 8/1/20 8/1/26 8/1/14 3/15/29 Provider Cancel Option Date . . . N/A N/A 8/1/07 N/A 4/15/07 4/15/07 N/A Option Premium ...... $ — $ — $10,047,805 $ — $7,467,000 $2,345,000 $ — City Pays ...... 2.964% BMA BMA 3.269% 3.259% 2.818% BMA Index x 1.36 Index + .0035 Payments Made by the City: as of 6/30/04 ...... $(5,676,883) $(3,354,395) $ — $(15,909,133) $(4,511,311) $(2,310,760) $(9,074,178) as of 6/30/03 ...... $ — $ — $ — $ — $ — $ — $ — City Receives ...... 61.85% of Adjusted Fixed 4.10% 62.8% of USD- 60.8% of USD- 61.8% of USD- USD-LIBOR-BBA USD-LIBOR- Rates as Set LIBOR-BBA LIBOR-BBA LIBOR-BBA BBA forth in the Confirm Payments Received by the City: as of 6/30/04 ...... $2,125,805 $11,769,374 $ — $4,666,302 $1,324,345 $785,866 $7,695,721 as of 6/30/03 ...... $ — $ — $ — $ — $ — $ — $ — First Counterparty Payment Date ...... 8/1/03 6/15/04 N/A 12/2/02 2/3/03 2/3/03 various dates, starting with 7/15/03 First City Payment Date ...... 2/4/04 6/15/04 N/A 8/1/03 8/1/03 8/1/03 various dates, starting with 7/15/03 Marked to Market Value: as of 6/30/04 ...... $17,868,132 $(2,018,353) $(11,690,000) $(2,753,610) $(8,640,167) $(2,923,237) $(18,117,047) as of 6/30/03 ...... $ — $ — $ — $(32,235,000) $(16,241,443) $(6,238,000) $(38,760,218)

N/A Not applicable. LIBOR London Interbank Offered Rate BMA Bond Market Association Municipal Swap Index

Synthetic Fixed Rate Transactions The City entered into its synthetic fixed rate swaps to take advantage of the low financing costs available through the swap market. To execute these transactions, in fiscal years 2004 and 2003, the City issued variable rate bonds and entered into swaps in which it pays a fixed interest rate and receives approximately 61.85% and 62% of LIBOR, respectively. As demonstrated in the table below, the net interest costs incurred through these swaps was significantly below those of a hypothetical concurrent traditional fixed rate financing. In connection with swaps 9 and 10, the City also sold options to the counterparty for a total of approximately $9.8 million, which gives the counterparty the right to cancel those swaps at par on April 15, 2007.

B-58 NOTES TO FINANCIAL STATEMENTS, Continued

Net Effective Interest Rates Resulting From Synthetic Fixed Rate Swaps 2004 AB 2003 CDE(1) 2003 GH 2003 GH Variable Variable Auction Variable _____$350M______$400M______$135M______$80M______Fixed payment to counterparty ...... 2.964% 3.269% 3.259% 2.818% Variable payment from counterparty(2) . . . . .______-0.693 ______-0.703 ______-0.681 ______-0.692 Net swap payments ...... 2.271 2.566 2.578 2.126 Variable rate bond payments ...... ______0.963 ______0.955 ______0.872 ______0.943 Net effective total interest costs ...... ______3.234% ______3.521% ______3.450% ______3.069% Concurrent traditional fixed rate(3) ...... ______5.050% ______5.200% ______4.805% ______4.805%

(1) Aggregation of four 2003CDE synthetic fixed rate SWAPs with identical terms. (2) Percentage of LIBOR: 2004AB Variable - 61.85%; 2003CDE Variable - 62.8%; 2003GH Auction - 60.8%; 2003GH Variable - 61.8%. (3) Hypothetical fixed rate bond issue on the day the swap priced. Calculated using market rates from that day and same amortization schedule as the swap.

Total Return Swap

The City entered into a total return swap in order to take advantage of synthetic variable interest rates that were substantially below those of traditional variable rate products. In this transaction, the City issued adjustable fixed rate bonds and entered into a swap in which it receives a fixed payment equivalent to the coupon on the underlying bonds and pays a variable rate of BMA plus 35 basis points. This synthetic variable rate of BMA plus 35 basis points was comparable to an approximate all-in-cost of BMA plus 66 basis points for variable rate demand bonds at the time the transaction was executed. The Termination Risk paragraph below includes a discussion of the adjustable component of the coupon on the underlying bonds. Swaption

The City entered into two swaption agreements for a total notional amount of $350.0 million. The City’s counterparties paid the City a total of $10.0 million for the right, beginning on August 1, 2007 and for every quarter thereafter until August 1, 2009, to enter the City into a swap in which the City would pay a variable rate equal to the BMA index and receive a fixed rate of 4.10%. The City entered into these transactions because the 10-year historical average of BMA at the time of the transaction was only approximately 3.04%. If the counterparties exercised their option to enter the swap and the level of BMA traded within the range of its historical average, the City would derive a financial accrual equal to the extent BMA averaged less than 4.10%. If the counterparties chose not to enter the swap, the City would benefit from the $10.0 million payment without any additional financial exposure.

Basis Swap

The City entered into a basis swap in order to convert its taxable general obligation variable rate debt, which trades based on LIBOR, into variable rate debt based on the BMA index. This index conversion was achieved through a swap in which the City receives a variable rate based on LIBOR (equal to the interest payment on the underlying taxable bonds) and pays 1.36 times the BMA index. As a result, the underlying taxable debt trades as a function of the same BMA index as the City’s approximately $5.0 billion of general obligation tax-exempt variable rate debt. The basis swap also serves as partial protection against the City’s increased debt service costs associated with rising interest rates. Because rising interest rates drive down the ratio of BMA to LIBOR, they result in a net increase in the City’s basis swap receipts. The City also received a $20 million cash payment from the counterparty as a part of the basis swap. Risks

Below is a list of risks inherent in the types of swap transactions that the City has entered into. Credit Risk: The risk that a counterparty (or its guarantor) will not meet its obligations under the swap. In this event, the City would have to pay another entity to assume the position of the defaulting counterparty. The City has sought to limit its counterparty risk by contracting only with highly rated entities or requiring guarantees of the counterparty’s obligations under the swap documents. Termination Risk: The risk that a counterparty will terminate a swap at a time when the City owes it a termination payment. The City has mitigated this risk by specifying that the counterparty has the right to terminate only as a result of the following events:

B-59 NOTES TO FINANCIAL STATEMENTS, Continued

a payment default by the City; other City defaults which remain uncured for 30 days after notice; City bankruptcy; insolvency of the City (or similar events); or a downgrade of the City’s credit rating below investment grade (i.e., BBB-/Baa3). The total return swap has a termination event in addition to those described above: the counterparty may terminate the swap on any business day on which the par value of the bonds exceeds the market value of the bonds by $75 million. The likelihood of such a discrepancy between the par and market values is mitigated by a reset mechanism which adjusts the bond coupon upward or downward by an amount equal to the movement of the AAA Municipal Market Data Index since its previous reset. Basis Risk: The risk that the City’s variable rate payments will not equal its variable rate receipts because they are based on different indexes. Under the terms of its synthetic fixed rate swap transactions, the City pays a variable rate on its bonds based on the BMA index but receives a variable rate on the swap based on a percentage of LIBOR. In its basis swap, the City’s variable payer rate is based on BMA and its variable receiver rate on a percentage of LIBOR. Tax Risk: The risk that a change in Federal tax rates will alter the fundamental relationship between BMA and LIBOR. A reduction in Federal tax rates, for example, will likely increase the City’s payment on its underlying variable rate bonds in the synthetic fixed rate transactions and variable payer rate in the basis swap.

15. Real Estate Tax

Real estate tax payments for the fiscal year ended June 30, 2004 were due July 1, 2003 and January 1, 2004 except that payments by owners of real property assessed at $80,000 or less and cooperatives whose individual units on average are valued at $80,000 or less were due in quarterly installments on the first day of each quarter beginning on July 1. The levy date for fiscal year 2004 taxes was June 24, 2003. The lien date is the date taxes are due. Real estate tax revenue represents payments received during the year and payments received (against the current fiscal year and prior years’ levies) within the first two months of the following fiscal year reduced by tax refunds for the fund financial statements. Additionally, the government-wide financial statements recognize real estate tax revenue (net of refunds) which are not available to the governmental fund type in the fiscal year for which the taxes are levied. On November 25, 2002, new property tax rates were adopted. These rates included an 18.5% increase for the second half of fiscal year 2003. This was the first increase in the average property tax rate since fiscal year 1992. For fiscal years 2004 and 2003, the increase brought the tax levy to $12.3 billion and $10.8 billion, respectively, which generated $11.6 billion and $10.1 billion in revenue, respectively, with respective increases of $1.5 billion and $1.3 billion in property taxes over fiscal years 2004 and 2003. The City offered a discount of 2% for the prepayment of real estate taxes for fiscal years 2005 and 2004. Collections of these real estate taxes received on or before June 30, 2004 and 2003 were $2.382 billion and $2.052 billion, respectively. These amounts were recorded as deferred revenue. The City sold approximately $97.8 million of real property tax liens, fully attributable to fiscal year 2004, at various dates in fiscal year 2004. As in prior year’s lien sale agreements, the City will refund the value of liens later determined to be defective, plus interest and a 5% surcharge. It has been estimated that $7.4 million worth of liens sold in fiscal year 2004 will require replacement. The estimated refund accrual amount of $8 million, including the surcharge and interest, results in fiscal year 2004 sale proceeds of $89.8 million. In fiscal year 2004, $8.6 million, including the surcharge and interest, was refunded for defective liens from the fiscal year 2003 sale. This resulted in a decrease to fiscal year 2004 revenue of $5.6 million for the refund amount in excess of the fiscal year 2003 accrual of $3 million and decreased the proceeds of the fiscal year 2003 sale to $17.0 million down from the original fiscal year 2003 proceeds reported last year of $22.6 million. The City sold approximately $25.6 million of real property tax liens, fully attributable to fiscal year 2003, at various dates in fiscal year 2003. As in prior year’s lien sale agreements, the City will refund the value of liens later determined to be defective, plus interest and a 5% surcharge. It has been estimated that $2.9 million worth of liens sold in fiscal year 2003 will require replacement. The estimated refund accrual amount of $3 million, including the surcharge and interest, results in fiscal year 2003 sale proceeds of $22.6 million. In fiscal year 2003, $20.1 million, including the surcharge and interest, was refunded for defective liens from the fiscal year 2002 sale. This resulted in a decrease to fiscal year 2003 revenue of $11.1 million for the refund amount in excess of the fiscal year

B-60 NOTES TO FINANCIAL STATEMENTS, Continued

2002 accrual of $9 million and decreased the proceeds of the fiscal year 2002 sale to $33.4 million down from the original fiscal year 2002 proceeds reported last year of $44.5 million. In fiscal years 2004 and 2003, $346 million and $371 million, respectively, were provided as allowances for uncollectible real estate taxes against the balance of the receivable. Delinquent real estate taxes receivable that are estimated to be collectible but which are not collected in the first two months of the next fiscal year are recorded as deferred revenues in the governmental funds balance sheet but included in general revenues on the government-wide statement of activities. The City is permitted to levy real estate taxes for general operating purposes in an amount up to 2.5% of the average full value of taxable real estate in the City for the last five years and in unlimited amounts for the payment of principal and interest on long- term City debt. Amounts collected for payment of principal and interest on long-term debt in excess of that required for that purpose in the year of the levy must be applied towards future years’ debt service. For the fiscal years ended June 30, 2004 and 2003, excess amounts of $307 million and $166 million, respectively, were transferred to the Debt Service Funds.

16. Other Taxes and Other Revenues

Taxpayer-assessed taxes, such as sales and income taxes, net of refunds, are recognized in the accounting period in which they become susceptible to accrual for the fund financial statements. Additionally, the government-wide financial statements recognize sales and income taxes (net of refunds) which are not available to the governmental fund type in the accounting period for which the taxes are assessed.

17. Federal, State, and Other Aid

For the government-wide and fund financial statements, categorical aid, net of a provision for estimated disallowances, is reported as receivables when the related eligibility requirements are met. Unrestricted aid is reported as revenue in the fiscal year of entitlement.

18. Bond Discounts/Issuance Costs

In governmental fund types, bond discounts and issuance costs are recognized as expenditures in the period incurred. Bond discounts in the government-wide financial statements units are deferred and amortized over the term of the bonds using a method which approximates the effective interest method. Bond discounts are presented as a reduction of the face amount of bonds payable, whereas issuance costs are recorded as deferred charges. Bond issuance costs are amortized in the government-wide financial statements over the term of the bonds using the straight-line method.

19. Intra-entity Activity

Payments from a fund receiving revenue to a fund through which the revenue is to be expended are reported as transfers. Such payments include transfers for debt service and capital construction. In the government-wide financial statements, resource flows between the primary government and the discretely presented component units are reported as if they were external transactions.

20. Subsidies

The City makes various payments to subsidize a number of organizations which provide services to City residents. These payments are recorded as expenditures in the year paid.

21. Pensions

Pension cost is required to be measured and disclosed using the accrual basis of accounting (see Note E.5.), regardless of the amount recognized as pension expense on the modified accrual basis of accounting. Annual pension cost should be equal to the annual required contributions to the pension plan, calculated in accordance with certain parameters.

22. Reclassifications and Adjustments

Reclassifications and adjustments of certain prior year amounts have been made to conform with the current year presentation and separately issued financial statements of reported entities.

B-61 NOTES TO FINANCIAL STATEMENTS, Continued

The fiscal year 2003 financial statements of the discretely presented component unit Water and Sewer System have been restated from the amounts previously reported to reflect adjustments to property, plant, and equipment, construction work-in-progress and depreciation and operation and maintenance expenses. The effects of these adjustments to the fiscal year 2003 financial statements of the Water and Sewer System which is reported as a major component unit in the basic financial statements are as follows: property, plant, and equipment, net of accumulated depreciation was increased by $638 million while construction work in-progress was decreased by $1.4 billion. Net assets at the beginning of the year were decreased by $785 million and net assets at the end of the year were decreased by $836 million. Expenses were increased by $51 million.

23. Estimates and Assumptions

A number of estimates and assumptions relating to the reporting of revenues, expenditures, assets and liabilities, and the disclosure of contingent liabilities were used to prepare these financial statements in conformity with GAAP. Actual results could differ from those estimates.

24. Pronouncements Issued But Not Yet Effective

In April, 2004, GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The Statement prescribes uniform financial reporting standards for Other Postemployment Benefits (OPEB) plans of all state and local governments. OPEB refers to postemployment benefits other than pension benefits and includes: (i) postemployment healthcare benefits and (ii) other types of postemployment benefits (e.g., life insurance) if provided separately from a pension plan. ‘Plans’ refer to trust or other funds through which assets are accumulated to finance OPEB, and benefits are paid as they become due. The Statement provides standards for measurement, recognition, and display of the assets, liabilities, and, where applicable, net assets and changes in net assets of such funds and for related disclosures. The requirements of Statement No. 43 apply whether an OPEB plan is reported as a trust or agency fund or a fiduciary component unit of a participating employer or plan sponsor, or the plan is separately reported by a public employee retirement system or other entity that administers the plan. While Statement No. 43 is effective for the City’s fiscal year ending June 30, 2007 and its earlier implementation encouraged, there is presently no impact on the City’s financial statements from the issuance of Statement No. 43 since the City only provides for OPEB on a pay-as-you-go basis and does not sponsor or participate in a formal OPEB plan. In June, 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The Statement establishes standards for the measurement, recognition, and display of Other Postemployment Benefits (OPEB) expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the financial reports of state and local governmental employers. OPEB includes postemployment healthcare, as well as other forms of postemployment benefits (e.g., life insurance) when provided separately from a pension plan. The approach followed in the Statement generally is consistent with the approach adopted in Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, with modifications to reflect differences between pension benefits and OPEB. Statement No. 45 improves the relevance and usefulness of financial reporting by: (i) recognizing the cost of benefits in periods when the related services are received by the employer; (ii) providing information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded; and (iii) providing information useful in assessing potential demands on the employer’s future cash flows. The City will be required to implement Statement No. 45 in fiscal year ending June 30, 2008. The component units currently included in the City’s financial reporting entity will also be required to implement Statement No. 45 at the same time the City implements the Statement. While earlier application of the Statement is encouraged, the City has not completed the task of estimating the impact of Statement No. 45 on its financial statements. However, the City anticipates that implementation of Statement No. 45 will result in significant additional expenses and liabilities being recorded in the government-wide financial statements.

B-62 NOTES TO FINANCIAL STATEMENTS, Continued

B. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

A summary reconciliation of the difference between total fund balances (deficit) as reflected on the governmental funds balance sheet and total net assets (deficit) of governmental activities as shown on the government-wide statement of net assets is presented in an accompanying schedule to the governmental funds balance sheet. The asset and liability elements which comprise the difference are related to the governmental funds using the current financial resources measurement focus and the modified accrual basis of accounting while the government-wide financial statements use the economic resources measurement focus and the accrual basis of accounting. A summary reconciliation of the difference between net change in fund balances as reflected on the governmental funds statement of revenues, expenditures, and changes in fund balances and change in net assets of governmental activities as shown on the government- wide statement of activities is presented in an accompanying schedule to the governmental funds statement of revenues, expenditures, and changes in fund balances. The revenue and expense elements which comprise the reconciliation difference stem from governmental funds using the current financial resources measurement focus and the modified accrual basis of accounting while the government-wide financial statements use the economic resources measurement focus and the accrual basis of accounting.

C. STEWARDSHIP,COMPLIANCE, AND ACCOUNTABILITY

1. Budgets and Financial Plans Budgets

Annual Expense Budget appropriations, which are prepared on the modified accrual basis, are adopted for the General Fund, and unused appropriations lapse at fiscal year-end. The City uses appropriations in the Capital Budget to authorize the expenditure of funds for various capital projects. Capital appropriations, unless modified or rescinded, remain in effect until the completion of each project. The City is required by State Law to adopt and adhere to a budget, on a basis consistent with GAAP, that would not have General Fund expenditures in excess of revenues. Expenditures made against the Expense Budget are controlled through the use of quarterly spending allotments and units of appropriation. A unit of appropriation represents a subdivision of an agency’s budget and is the level of control at which expenditures may not legally exceed the appropriation. The number of units of appropriation and the span of operating responsibility which each unit represents, differs from agency to agency depending on the size of the agency and the level of control required. Transfers between units of appropriation and supplementary appropriations may be made by the Mayor subject to the approval provisions set forth in the City Charter. Supplementary appropriations increased the Expense Budget by $4.350 billion and $2.964 billion subsequent to its original adoption in fiscal years 2004 and 2003, respectively. Financial Plans

The New York State Financial Emergency Act for The City of New York, as amended in 1978, requires the City to operate under a “rolling” Four-Year Financial Plan (Plan). Revenues and expenditures, including operating transfers, of each year of the Plan are required to be balanced on a basis consistent with GAAP. The Plan is broader in scope than the Expense Budget; it comprises General Fund revenues and expenditures, Capital Projects Fund revenues and expenditures, and all short and long-term financing. The Expense Budget is generally consistent with the first year of the Plan and operations under the Expense Budget must reflect the aggregate limitations contained in the approved Plan. The City reviews its Plan periodically during the year and, if necessary, makes modifications to incorporate actual results and revisions to assumptions.

2. Deficit Fund Balance

The New York City Capital Projects Fund has cumulative deficits of $1.7 billion and $1.4 billion at June 30, 2004 and 2003, respectively. These deficits represent the amounts expected to be financed from future bond issues or intergovernmental reimbursements. To the extent the deficits will not be financed or reimbursed, a transfer from the General Fund will be required.

B-63 NOTES TO FINANCIAL STATEMENTS, Continued

D. DETAILED NOTES ON ALL FUNDS

1. Deposits and Investments Deposits

The City’s bank depositories are designated by the Banking Commission, which consists of the Comptroller, the Mayor, and the Finance Commissioner. Independent bank rating agencies are used to determine the financial soundness of each bank, and the City’s banking relationships are under periodic operational and credit reviews. The City Charter limits the amount of deposits at any time in any one bank or trust company to a maximum of one-half of the amount of the capital and net surplus of such bank or trust company. The discretely presented component units included in the City’s reporting entity maintain their own banking relationships which generally conform with the City’s. Bank balances are currently insured up to $100,000 in the aggregate by the Federal Deposit Insurance Corporation (FDIC) for each bank for all funds other than monies of the retirement systems, which are held by well-capitalized banks and are insured by the FDIC up to $100,000 per retirement system member. At June 30, 2004 and 2003, the carrying amount of the City’s unrestricted cash and cash equivalents was $2.134 billion and $4.318 billion, respectively, and the bank balances were $1.865 billion and $3.233 billion, respectively. Of the unrestricted bank balances, $.674 billion and $1.153 billion were uninsured and uncollateralized at June 30, 2004 and 2003, respectively. At June 30, 2004 and 2003, the carrying amount of the restricted cash and cash equivalents was $.606 billion and $.959 billion, respectively, and the bank balances were $.9 million and $1.703 million, respectively. Of the bank balances, $.708 million and $1.503 million, respectively, were uninsured and uncollaterized. The uninsured, collateralized and the uninsured, uncollateralized cash balances carried during the year represent primarily the compensating balances that are required to be maintained at banks in exchange for services provided. It is the policy of the City to invest all funds in excess of compensating balance requirements. Investments

The City’s investment of cash in its governmental fund types is currently limited to U.S. Government guaranteed securities and U.S. Government agency securities purchased directly and through repurchase agreements from primary dealers as well as commercial paper rated A1 and P1 by Standard & Poor’s Corporation and Moody’s Investors Service, Inc., respectively. The repurchase agreements must be collateralized by U.S. Government guaranteed securities, U.S. Government agency securities, or eligible commercial paper in a range of 100% to 102% of the matured value of the repurchase agreements. The following is a summary of the fair value of investments of the City as of June 30, 2004 and 2003 and with the exception of footnote (1), all of which mature in less than one year:

______2004 ______2003 (in thousands) Governmental activities:

______Investment Type

______Unrestricted Commercial paper ...... $1,260,969 $ 82,723 U.S. Government securities ...... 1,291,836 309,302 Money markets ...... 1,411,286 — U.S. Discount notes ...... 709,487 — Repurchase agreements ...... ______1,036,011 ______327,344 Total unrestricted ...... $5,709,589______$719,369______

______Restricted Commercial paper ...... $ 161,470 $159,491 U.S. Government securities . . . . . 5,584 — U.S. Discount notes ...... ______313,400(1) ______1,002 Total restricted ...... $______480,454 $160,493______(1) $307,295 of restricted U.S. Discount notes for fiscal year 2004 matures in 1 to 5 years. B-64 NOTES TO FINANCIAL STATEMENTS, Continued

The investment policies of the discretely presented component units included in the City’s reporting entity generally conform to those of the City’s. The criteria for the Pension and Other Employee Benefit Trust Funds’ investments are as follows: 1. Fixed income investments may be made in U.S. Government guaranteed securities or securities of U.S. Government agencies, securities of companies rated BBB or better by both Standard and Poor’s Corporation and Moody’s Investors Service, Inc., and any bond that meets the qualifications of the New York State Retirement and Social Security Law, the New York State Banking Law, and the New York City Administrative Code. 2. Equity investments may be made only in those stocks that meet the qualifications of the New York State Retirement and Social Security Laws, the New York State Banking Law, and the New York City Administrative Code. 3. Short-term investments may be made in the following: a. U.S. Government guaranteed securities or U.S. Government agency securities. b. Commercial paper rated A1 or P1 or F1 by Standard & Poor’s Corporation or Moody’s Investors Service, Inc. or Fitch, respectively. c. Repurchase agreements collateralized in a range of 100% to 102% of matured value, purchased from primary dealers of U.S. Government securities. d. Investments in bankers’ acceptances, certificates of deposit, and time deposits are limited to banks with worldwide assets in excess of $50 billion that are rated within the highest categories of the leading bank rating services and selected regional banks also rated within the highest categories. 4. Investments up to 15% of total pension fund assets in instruments not specifically covered by the New York State Retirement and Social Security Law. 5. No investment in any one corporation can be: (i) more than 2% of the pension plan net assets; or (ii) more than 5% of the total outstanding issues of the corporation. All investments are held by the City’s custodial banks (in bearer or book-entry form) solely as agent of the Comptroller of The City of New York on behalf of the various account owners. Payments for purchases are not released until evidence of ownership of the underlying investments are received by the City’s custodial bank. Securities Lending

State statutes and boards of trustees policies permit the Pension and Retirement Systems and certain Variable Supplements Funds (Systems and Funds) to lend their securities (the underlying securities) to brokers-dealers and other entities with a simultaneous agreement to return the collateral for the same securities in the future. The Systems’ and Funds’ custodians lend the following types of securities: short-term securities, common stock, long-term corporate bonds, U.S. Government and U.S. Government agencies’ bonds, asset-backed securities, and international equities and bonds held in collective investment funds. At year-end, the Systems and Funds had no credit risk exposure to borrowers because the amounts the Systems and Funds owe the borrowers exceed the amounts the borrowers owe the Systems and Funds. The contracts with the Systems’ and Funds’ custodian requires borrowers to indemnify the Systems and Funds if the borrowers fail to return the securities, if the collateral is inadequate, and if the borrowers fail to pay the Systems and Funds for income distributions by the securities’ issuers while the securities are on loan. All securities loans can be terminated on demand within a period specified in each agreement by either the Systems and Funds or the borrowers. The underlying fixed income securities have an average maturity of 10 years. Cash collateral is invested in the lending agents’ short-term investment pools, which have a weighted-average maturity of 90 days. During fiscal year 2003, the value of certain underlying securities became impaired because of the credit failure of the issuer. Accordingly, the carrying amounts of the collateral reported in four of the Systems’ statements of fiduciary net assets were reduced by a total of $80 million to reflect this impairment and reflect the net realizable value of the securities purchased with collateral from securities lending transactions. During fiscal year 2004, $5.8 million of this amount was recovered as a distribution of bankruptcy proceeds and subsequent to June 30, 2004, an additional $15 million was received as a partial settlement from litigation. The City reports securities loaned as assets on the Statement of Fiduciary Net Assets. Cash received as collateral on securities lending transactions and investments made with that cash are also recorded as assets. Liabilities resulting from these transactions are reported on the Statement of Fiduciary Net Assets. Accordingly, the City records the investments purchased with the cash collateral as Investments, Collateral From Securities Lending Transactions with a corresponding liability as Securities Lending Transactions.

B-65 NOTES TO FINANCIAL STATEMENTS, Continued

2. Capital Assets

The following is a summary of capital assets activity for the fiscal years ended June 30, 2003 and 2004: Balance Balance Balance June 30, June 30, June 30, ______Primary Government ______2002 ______Additions ______Deletions ______2003 ______Additions ______Deletions ______2004 (in thousands) Governmental activities: Capital assets, not being depreciated: Land ...... $ 736,883 $ 2,028 $ — $ 738,911 $ 21,694 $ — $ 760,605 Construction work-in- progress ...... ______7,196,759 ______1,980,856 ______6,205,128 ______2,972,487 ______1,872,094 ______2,156,848 ______2,687,733

Total capital assets, not being depreciated ...... ______7,933,642 ______1,982,884 ______6,205,128 ______3,711,398 ______1,893,788 ______2,156,848 ______3,448,338 Capital assets, being depreciated: Buildings ...... 19,852,161 6,205,128 51,409 26,005,880 2,156,848 49,814 28,112,914 Equipment ...... 5,566,349 773,557 603,361 5,736,545 163,613 202,044 5,698,114 Infrastructure ...... ______9,497,295 ______811,120 ______281,498 ______10,026,917 ______843,968 ______376,617 ______10,494,268 Total capital assets, being depreciated ...... ______34,915,805 ______7,789,805 ______936,268 ______41,769,342 ______3,164,429 ______628,475 ______44,305,296 Less accumulated depreciation: Buildings ...... 8,599,353 1,051,950 40,805 9,610,498 869,455 19,110 10,460,843 Equipment ...... 4,043,914 528,948 1,381,921 3,190,941 413,061 195,175 3,408,827 Infrastructure ...... ______3,547,109 ______509,933 ______272,607 ______3,784,435 ______517,590 ______376,617 ______3,925,408 Total accumulated depreciation ...... ______16,190,376 ______2,090,831(1) ______1,695,333 ______16,585,874 ______1,800,106(1) ______590,902 ______17,795,078 Total capital assets, being depreciated, net ...... ______18,725,429 ______5,698,974 ______(759,065) ______25,183,468 ______1,364,323 ______37,573 ______26,510,218 Governmental activities capital assets, net ...... ______$26,659,071 ______$7,681,858 ______$5,446,063 ______$28,894,866 ______$3,258,111 ______$2,194,421 ______$29,958,556

(1) Depreciation expense was charged to functions/programs of the City for the fiscal years ended June 30, 2004 and 2003 as follows: ______2004 ______2003 (in thousands) Governmental activities: General government ...... $ 282,043 $ 371,904 Public safety and judicial ...... 158,771 203,205 Education ...... 504,266 615,105 City University ...... 11,054 11,866 Social services ...... 75,066 101,224 Environmental protection ...... 160,663 173,928 Transportation services ...... 393,981 396,201 Parks, recreation and cultural activities ...... 185,576 188,573 Health ...... 17,630 17,726 Libraries ...... ______11,056 ______11,099 Total depreciation expense—governmental activities ...... $1,800,106______$2,090,831______

B-66 NOTES TO FINANCIAL STATEMENTS, Continued

The following are the sources of funding for the governmental activities capital assets for the fiscal years ended June 30, 2004 and 2003. Sources of funding for capital assets are not available prior to fiscal year 1987. ______2004 ______2003 (in thousands) Capital Projects Funds: Prior to fiscal year 1987 ...... $ 5,756,420 $ 6,008,003 City bonds ...... 37,925,804 36,204,693 Federal grants ...... 879,841 387,414 State grants ...... 167,799 165,371 Private grants ...... 159,727 55,868 Capitalized leases ...... ______2,864,043 ______2,659,391 Total funding sources ...... $47,753,634______$45,480,740______At June 30, 2004 and 2003, governmental activities capital assets include approximately $1.2 billion of City-owned assets leased for $1 per year to the New York City Transit Authority which operates and maintains the assets. In addition, assets leased to HHC and to the Water and Sewer System are excluded from the governmental activities capital assets and are recorded in the respective component unit financial statements. Included in land and buildings at June 30, 2004 and 2003 are leased properties capitalized at $2.864 billion and $2.659 billion, respectively, with related accumulated amortization of $517 million and $448 million, respectively. Capital Commitments

At June 30, 2004, the outstanding commitments relating to projects of the New York City Capital Projects Fund amounted to approximately $9.3 billion. To address the need for significant infrastructure and public facility capital investments, the City has prepared a ten-year capital spending program which contemplates New York City Capital Projects Fund expenditures of $43.5 billion over the remaining fiscal years 2005 through 2013. To help meet its capital spending program, the City and TFA borrowed $4.3 billion in the public credit market in fiscal year 2004. The City plans to borrow $3.4 billion in the public credit market in fiscal year 2005.

3. Leases

The City leases a significant amount of property and equipment from others. Leased property having elements of ownership is recorded in the government-wide financial statements. The related obligations, in amounts equal to the present value of minimum lease payments payable during the remaining term of the leases, are also recorded in the government-wide financial statements. Other leased property not having elements of ownership are classified as operating leases. Both capital and operating lease payments are recorded as expenditures when payable. Total expenditures on such leases for the fiscal years ended June 30, 2004 and 2003 were approximately $519 million and $498 million, respectively.

B-67 NOTES TO FINANCIAL STATEMENTS, Continued

As of June 30, 2004, the City (excluding discretely presented component units) had future minimum payments under capital and operating leases with a remaining term in excess of one year as follows: Capital Operating _____Leases______Leases ______Total Governmental activities: (in thousands) Fiscal year ending June 30: 2005 ...... $ 198,014 $ 313,656 $ 511,670 2006 ...... 206,326 301,723 508,049 2007 ...... 206,401 292,771 499,172 2008 ...... 203,530 273,505 477,035 2009 ...... 177,752 252,773 430,525 2010-2014 ...... 805,946 944,934 1,750,880 2015-2019 ...... 689,971 627,026 1,316,997 2020-2024 ...... 601,418 199,426 800,844 2025-2029 ...... 356,439 14,825 371,264 2030-2034 ...... 206,806 360 207,166 2035-2039 ...... ______95,849 ______— ______95,849 Future minimum payments ...... 3,748,452 $3,220,999______$6,969,451______Less interest ...... ______1,402,463 Present value of future minimum payments ...... $2,345,989______The present value of future minimum lease payments includes approximately $1.707 billion for leases with Public Benefit Corporations (PBC) where State law generally provides that in the event the City fails to make any required lease payment, the amount of such payment will be deducted from State aid otherwise payable to the City and paid to PBC. The City also leases City-owned property to others, primarily for markets, ports, and terminals. Total rental revenue on these capital and operating leases for the fiscal years ended June 30, 2004 and 2003 was approximately $108 million and $109 million, respectively. As of June 30, 2004, the following future minimum rentals are provided for by the leases: Capital Operating ______Leases______Leases______Total Governmental activities: (in thousands) Fiscal year ending June 30: 2005 ...... $ 7,466 $ 62,119 $ 69,585 2006 ...... 7,657 56,962 64,619 2007 ...... 7,762 49,694 57,456 2008 ...... 7,877 43,376 51,253 2009 ...... 7,934 42,108 50,042 2010-2014 ...... 33,928 170,807 204,735 2015-2019 ...... 30,837 118,347 149,184 2020-2024 ...... 30,823 82,624 113,447 2025-2029 ...... 27,661 60,993 88,654 2030-2034 ...... 10,230 47,846 58,076 2035-2039 ...... 8,078 45,786 53,864 2040-2044 ...... 5,885 45,532 51,417 2045-2049 ...... 5,574 45,662 51,236 2050-2054 ...... 5,475 39,420 44,895 2055-2059 ...... 5,475 38,917 44,392 2060-2064 ...... 5,475 38,917 44,392 2065-2069 ...... 5,475 38,917 44,392 2070-2074 ...... 5,475 37,004 42,479 2075-2079 ...... 5,096 30,807 35,903 2080-2084 ...... 320 21,692 22,012 2085-2089 ...... ______— ______10,846 ______10,846 Future minimum lease rentals ...... 224,503______$1,128,376 ______$1,352,879 Less interest ...... ______92,495 Present value of future minimum lease rentals ...... ______$132,008

B-68 NOTES TO FINANCIAL STATEMENTS, Continued

4. Short-Term Liabilities Changes in Short-term liabilities

In fiscal years 2003 and 2004, the changes in short-term liabilities were as follows: Balance Balance Balance June 30, June 30, June 30, ______Primary Government ____ 2002______Additions ______Deletions______2003______Additions ______Deletions ______2004 (in thousands) Governmental activities: Notes payable: Revenue anticipation notes (1) . $ — $1,500,000 $1,500,000 $ — $1,250,000 $1,250,000 $ — Tax anticipation notes (1) . . . . — — — — 250,000 250,000 — Bond anticipation notes (2) . . .______2,200,000______1,110,000 ______2,200,000 ______1,110,000 ______— ______1,110,000______— Total notes payable ...... $2,200,000______$2,610,000______$3,700,000______$1,110,000______$1,500,000______$2,610,000______$______—

(1) Revenue anticipation notes and tax anticipation notes are used by the City to satisfy its cash flow needs. (2) Bond anticipation notes are used by TFA to provide financing for the City’s capital expenditures.

5. Long-Term Liabilities Changes in Long-term liabilities

In fiscal years 2003 and 2004, the changes in long-term liabilities were as follows: Due Balance Balance Balance Within June 30, June 30, June 30, One ______Primary Government______2002 ______Additions ______Deletions ______2003______Additions ______Deletions______2004______Year (in thousands) Governmental activities: Bonds payable: General obligation bonds ...... $28,465,484 $ 4,873,575 $3,660,050 $29,679,009 $6,461,265 $4,761,889 $31,378,385 $1,461,736 1991 general resolution bonds ...... 2,879,640 — 728,320 2,151,320 — 393,305 1,758,015 — Future tax secured bonds ...... 8,288,665 5,799,825 2,064,230 12,024,260 1,940,860 601,235 13,363,885 389,260 Tobacco flexible amortization bonds ...... 740,108 527,127 8,915 1,258,320 39,709 42,310 1,255,719 20,755 Japanese Yen bonds ...... 40,000 — 40,000 — — — — — IDA bonds ...... — — — — 107,960 — 107,960 1,695 Revenue bonds(1) ...... ______125,205 ______— ______8,240 ______116,965 ______— ______9,775 ______107,190______10,330 Total before treasury obligations and discounts ...... 40,539,102 11,200,527 6,509,755 45,229,874 8,549,794 5,808,514 47,971,154 1,883,776 Less treasury obligations ...... ______116,271 ______— ______52,275 ______63,996 ______— ______12,480 ______51,516______12,664 Total before discounts ...... 40,422,831 11,200,527 6,457,480 45,165,878 8,549,794 5,796,034 47,919,638 1,871,112 Less discounts (net) ...... ______347,161 ______12,670 ______229,763 ______130,068 ______35,523 ______341,574 ______(175,983)______— Total bonds payable ...... 40,075,670 11,187,857 6,227,717 45,035,810 8,514,271 5,454,460 48,095,621 1,871,112 Capital lease obligations ...... 2,298,139 41,918 128,898 2,211,159 204,652 69,822 2,345,989 604,399 Real estate tax refunds ...... 579,720 233,466 116,624 696,562 111,380 173,563 634,379 133,185 Other tax refunds ...... 1,367,130 185,604 135,130 1,417,604 119,649 367,386 1,169,867 119,649 Judgments and claims ...... 4,337,020 1,182,606 982,224 4,537,402 1,115,333 1,225,601 4,427,134 1,091,204 Vacation and sick leave ...... 2,215,941 622,174 240,623 2,597,492 118,499 159,326 2,556,665 158,628 Pension liability ...... 327,800 294,700 37,000 585,500 187,600 65,100 708,000 — Landfill closure and post- closure care costs ...... ______1,282,669 ______33,588 ______52,488 ______1,263,769 ______126,531 ______39,168 ______1,351,132______53,471 Total changes in governmental activities long-term liabilities ...... $52,484,089______$13,781,913______$7,920,704______$58,345,298______$10,497,915______$7,554,426______$61,28______8,787__ $4,031,648______

(1) The debt of ECF is reported as bonds outstanding pursuant to its treatment as a component unit (see Note A.1.). Note: City bonds payable are generally liquidated with resources of the General Debt Service Fund. Other long-term liabilities are generally liquidated with resources of the General Fund.

B-69 NOTES TO FINANCIAL STATEMENTS, Continued

The bonds payable, net of treasury obligations, at June 30, 2004 and 2003 summarized by type of issue are as follows:

______2004 ______2003 General General ______Primary Government______Obligations______Revenue______Total______Obligations ______Revenue______Total (in thousands) Governmental activities: Bonds payable: General obligation bonds ...... $31,326,869 $ — $31,326,869 $29,615,013 $ — $29,615,013 1991 general resolution bonds ...... 1,758,015 — 1,758,015 2,151,320 — 2,151,320 Future tax secured bonds ...... 13,363,885 — 13,363,885 12,024,260 — 12,024,260 Tobacco flexible amortization bonds ...... 1,255,719 — 1,255,719 1,258,320 — 1,258,320 IDA bonds ...... 107,960 — 107,960 — — — Revenue bonds ...... ______—______107,190______107,190 ______—______116,965______116,965 Total bonds payable ...... $47,812,448______$107,190______$47,919,638______$45,048,913______$116,965______$45,165,878______

The following table summarizes future debt service requirements as of June 30, 2004:

______Governmental Activities ______General Obligation Bonds ______Revenue Bonds ______Primary Government______Principal ______Interest(1) ______Principal______Interest (in thousands) Fiscal year ending June 30: 2005 ...... $1,860,782 $1,933,816 $10,330 $ 5,687 2006 ...... 2,304,289 1,890,775 10,880 5,148 2007 ...... 2,489,667 1,780,727 11,450 4,569 2008 ...... 2,519,682 1,662,937 12,070 3,949 2009 ...... 2,569,080 1,548,884 9,050 3,282 2010-2014 ...... 10,518,406 6,479,442 26,170 11,249 2015-2019 ...... 9,985,682 4,273,840 9,280 6,524 2020-2024 ...... 8,766,472 2,291,721 12,125 3,676 2025-2029 ...... 5,122,254 809,014 5,835 486 2030-2034 ...... 1,654,823 111,982 — — 2035-2039 ...... 21,263 2,417 — — 2040-2044 ...... 3——— Thereafter until 2147 ...... ______45——— ______47,812,448 22,785,555 107,190 44,570 Less interest component ...... ______— ______22,785,555 ______—______44,570 Total future debt service requirements ...... $47,812,448______$______— ______$107,190______$ —

(1) Includes interest for general obligation bonds estimated at 4% rate on tax-exempt adjustable rate bonds and at 6% rate on taxable adjustable rate bonds which are the rates at the end of the fiscal year.

B-70 NOTES TO FINANCIAL STATEMENTS, Continued

The average (weighted) interest rates for outstanding City general obligation bonds as of June 30, 2004 and 2003 were 4.9% and 5.0%, respectively, and both ranged from 0% to 13.5%, and the interest rates on outstanding MAC bonds as of both June 30, 2004 and 2003 ranged from 9% to 13.5%. The last maturity of the outstanding City debt is in the year 2147. In fiscal years 2004 and 2003, the City issued $3.417 billion and $2.714 billion, respectively, of general obligation bonds to advance refund general obligation bonds of $3.258 billion and $2.599 billion, respectively, aggregate principal amounts. The net proceeds from the sales of the refunding bonds, together with other funds of $3.0 million and $4.4 million, respectively, were irrevocably placed in escrow accounts and invested in United States Government securities. As a result of providing for the payment of the principal and interest to maturity, and any redemption premium, the advance refunded bonds are considered to be defeased and, accordingly, the liability is not reported in the government-wide financial statements. In fiscal year 2004, the refunding transactions will decrease the City’s aggregate debt service payments by $240.1 million and provide an economic gain of $198.5 million. In fiscal year 2003, the refunding transactions decreased the City’s aggregate debt service payments by $127.5 million and provided an economic gain of $142.6 million. At June 30, 2004 and 2003, $8.538 billion and $8.475 billion, respectively, of the City’s outstanding general obligation bonds were considered defeased. The State Constitution requires the City to pledge its full faith and credit for the payment of the principal and interest on City term and serial bonds and guaranteed debt. The general debt-incurring power of the City is limited by the Constitution to 10% of the average of five years’ full valuations of taxable real estate. Excluded from this debt limitation is certain indebtedness incurred for water supply, certain obligations for transit, sewage, and other specific obligations which exclusions are based on a relationship of debt service to net revenue. As of July 1, 2004, the 10% general limitation was approximately $43.115 billion (compared with $39.991 billion as of July 1, 2003). Also, as of July 1, 2004, the combined City and TSASC remaining debt-incurring power totaled $9.275 billion, after providing for capital commitments. On June 16, 2003, a “Downgrade Trapping Event” occurred as defined in the Indenture, dated as of November 1, 1999, between TSASC and the Bank of New York as Trustee (the Indenture), which requires the funding of an additional reserve for the benefit of TSASC bondholders from amounts that would otherwise be paid to the City. The Indenture requires that tobacco settlement revenues (TSRs) and other revenue received after the occurrence of a Downgrade Trapping Event in an amount equal to the lesser of (a) 25% of the principal amount of outstanding bonds or (b) that portion of the installment equal to the ratio of the principal amount of bonds issued to $2.76 billion be deposited in the trapping account established under the Indenture. Accordingly, at June 30, 2004 and 2003, 47.86% and 46.46%, respectively, of TSRs and other revenues were to be deposited in the trapping account until an amount equal to the trapping requirement is retained. The trapping requirement is 25% of outstanding TSASC bonds, or approximately $313.9 million and $314.6 million as of June 30, 2004 and 2003, respectively. Based on the projection of TSRs made in August, 2002 in connection with the issuance of TSASC’s Series 2002-1 bonds, it is anticipated that the trapping requirement will be fulfilled in April, 2008 or earlier, if funded from sources other than TSRs. On September 15, 2003, TSASC announced that it does not intend to issue any additional bonds to the public under the Indenture and that it is reviewing restructuring alternatives for its outstanding bonds. TSASC and the City are considering various alternatives to eliminate or meet the trapping requirement, some of which would not involve a refunding of TSASC’s bonds. No decision has been reached as to the method or as to the timing of any restructuring. Pursuant to State legislation on January 1, 1979, the City established a General Debt Service Fund administered and maintained by the State Comptroller into which payments of real estate taxes and other revenues are deposited in advance of debt service payment dates. Debt service on all City notes and bonds is paid from this Fund. In fiscal year 2004, discretionary and other transfers of $972 million were made from the General Fund to the General Debt Service Fund for fiscal year 2005 debt service. In addition, in fiscal year 2004, discretionary transfers of $71 million were made to component units of the Debt Service Funds. In fiscal year 2003, discretionary and other transfers of $407 million were made from the General Fund to the General Debt Service Fund for fiscal year 2004 debt service. In addition, in fiscal year 2003, discretionary transfers of $73 million were made to component units of the Debt Service Funds.

B-71 NOTES TO FINANCIAL STATEMENTS, Continued

Swap payments and associated debt

The table that follows represents debt service payments on certain general obligation variable-rate bonds, net of swap payments (see Note A.14.) associated with those bonds, as of June 30, 2004. Although interest rates on variable rate debt change over time, the calculations included in the table below are based on the assumption that the variable rate on June 30, 2004 remains constant over the life of the bonds.

______Governmental Activities ______General Obligation Bonds Interest Rate ______Primary Government______Principal ______Interest______Swaps, Net______Total (in thousands) Fiscal year ending June 30: 2005 ...... $ 8,175 $ 141 $ 13 $ 8,329 2006 ...... 8,370 145 13 8,528 2007 ...... 8,660 150 13 8,823 2008 ...... 9,005 156 14 9,175 2009 ...... 19,845 287 31 20,163 2010-2014 ...... 192,415 2,357 2,163 196,935 2015-2019 ...... 392,290 4,237 7,218 403,745 2020-2024 ...... 551,575 5,690 6,110 563,375 2025-2029 ...... 297,370 2,861 6,054 306,285 2030-2034 ...... 138,080 1,337 2,803 142,220 ______Total ...... $1,625,785______$17,361 $24,432______$1,667,578______Judgments and Claims

The City is a defendant in lawsuits pertaining to material matters, including claims asserted which are incidental to performing routine governmental and other functions. This litigation includes but is not limited to: actions commenced and claims asserted against the City arising out of alleged torts; alleged breaches of contracts; alleged violations of law; and condemnation proceedings. As of June 30, 2004 and 2003, claims in excess of $534 billion and $542 billion, respectively, were outstanding against the City for which the City estimates its potential future liability to be $4.4 billion and $4.5 billion, respectively. As explained in Note A.12., the estimate of the liability for unsettled claims has been reported in the government-wide statement of net assets under noncurrent liabilities. The liability was estimated by categorizing the various claims and applying a historical average percentage, based primarily on actual settlements by type of claim during the preceding ten fiscal years, and supplemented by information provided by the New York City Law Department with respect to certain large individual claims and proceedings. The recorded liability is the City’s best estimate based on available information and application of the foregoing procedures. There are currently 95 plaintiffs alleging respiratory or other injuries from alleged toxic exposures to World Trade Center dust and debris. The actions, which seek approximately $500 million in damages, were either commenced in or have been removed to Federal court pursuant to the Air Transportation and System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) (the Act), which grants exclusive Federal jurisdiction for all claims related to or resulting from the September 11 attack. These consist mainly of Department of Sanitation employees who worked hauling World Trade Center debris at the Fresh Kills Landfill, but also include several police officers and construction workers injured either at Ground Zero or Fresh Kills. On March 10, 2004, the Southern District of New York dismissed a case filed on behalf of 12 firefighters alleging wrongful death. Plaintiffs have filed a notice of appeal. On June 20, 2003, the Southern District of New York ordered that actions alleging injuries resulting from exposure to World Trade Center debris on or before September 29, 2001 would remain in Federal court, while those alleging injuries based on exposure after that date would be remanded to state court. It is unclear what effect the decision will have on cases arising from the September 11 attack and on the application of the Act’s limitation on the City’s liability for actions arising from the September 11 attack. The City has appealed this decision. A property damage claim relating to the September 11 attack relating to 7 World Trade Center (7 WTC) alleges significant damages. The claim alleges damages to Con Edison and its insurers, which claim $314 million for the loss of the electrical substation over which 7 WTC was built. The claim alleges that a diesel fuel tank, which stored fuel for emergency back-up power to the City’s

B-72 NOTES TO FINANCIAL STATEMENTS, Continued

Office of Emergency Management facility on the 23rd floor, contributed to the building’s collapse. Con Edison and its insurers filed suit based on the allegations in their claim. One hundred ninety-one notices of claim have been filed and 177 actions in Federal court commenced against the City in connection with the Staten Island Ferry accident on October 15, 2003. The notices and actions seek damages exceeding $3 billion for various claims including personal injury, wrongful death, and emotional distress. On December 1, 2003, the City filed a limitation complaint in Federal court pursuant to Federal maritime law seeking to limit its potential liability to approximately $14 million, the value of the ferry involved in the accident. In February, 1997, a former New York City school principal filed an action in New York State Supreme Court challenging the investment policies and practices of the Retirement Board of the New York City Teachers’ Retirement System (TRS) with regard to a component of TRS consisting of member contributions and earnings thereon known as the Variable B Fund. Plaintiff alleges that the trustees of TRS illegally maintained the Variable B Fund as a fixed-income fund and ignored a requirement that a substantial amount of the Variable B Fund’s assets be invested in equity securities. The defendants are TRS and its individual trustees. Plaintiff seeks damages on behalf of all Variable B Fund participants in excess of $2 billion. In May, 1999, the Appellate Division, First Department, affirmed the Supreme Court’s earlier denial of the defendants’ motion for summary judgment. The discovery previously directed by the Appellate Division has now been completed and defendants have moved for summary judgment. If the plaintiff were to prevail in this action, it could result in substantial costs to the City. In addition to the above claims and proceedings, numerous real estate tax certiorari proceedings are presently pending against the City on grounds of alleged overvaluation, inequality, and illegality of assessment. In response to these actions, in December, 1981, State legislation was enacted which, among other things, authorizes the City to assess real property according to four classes and makes certain evidentiary changes in real estate tax certiorari proceedings. Based on historical settlement activity, the City estimates its potential liability for outstanding certiorari proceedings to be $634 million and $697 million at June 30, 2004 and 2003, respectively, as reported in the government-wide financial statements. Pension Liability

As of June 30, 2004 and 2003, the City’s pension liability resulted from State legislation (Chapter 125 of the Laws of 2000) enacted during their Spring 2000 session, which provides automatic cost-of-living adjustments for eligible retirees and eligible beneficiaries beginning September, 2000 and a phase-in schedule for funding the additional actuarial liabilities created by the benefits provided by this law (see Note E.5.). Landfill Closure and Postclosure Care Costs

Heretofore, the City’s only active landfill available for waste disposal was the Fresh Kills landfill which initially ceased landfill operations in March, 2001. The landfill was reopened per the Governor’s amended Executive Order No. 113, which authorized the City to continue the acceptance and disposal of waste materials received from the site of the World Trade Center disaster of September 11, 2001. The landfill subsequently closed in August, 2002. For government-wide financial statements, the measurement and recognition of the liability for closure and postclosure care is based on total estimated current cost and landfill usage to date. For fund financial statements, expenditures are recognized using the modified accrual basis of accounting where a liability is recognized only when liquidated with expendable financial resources. Upon the landfill becoming inactive, the City is required by Federal and State law to close the landfill, including final cover, stormwater management, landfill gas control, and to provide postclosure care for a period of 30 years following closure. The City is also required under Consent Order with the New York State Department of Environmental Conservation to conduct certain corrective measures associated with the landfill. The corrective measures include construction and operation of a leachate mitigation system for the active portions of the landfill as well as closure, postclosure, and groundwater monitoring activities for the sections no longer accepting solid waste. The liability for these activities as of June 30, 2004 which equates to the total estimated current cost is $1.157 billion based on the maximum cumulative landfill capacity used to date. There are no costs remaining to be recognized. During fiscal year 1996, New York State legislation was enacted which states that no waste will be accepted at the Fresh Kills landfill on or after January 1, 2002. Accordingly, the liability for closure and postclosure care costs is based upon an effective cumulative landfill capacity used to date of approximately 100%. Cost estimates are based on current data including contracts awarded by the City, contract bids, and engineering studies. These estimates are subject to adjustment for inflation and to account for any changes in landfill conditions, regulatory requirements, technologies, or cost estimates.

B-73 NOTES TO FINANCIAL STATEMENTS, Continued

During fiscal year 2004, expenditures for landfill closure and postclosure care costs totaled $45.7 million. Resource Conservation and Recovery Act Subtitle D Part 258, which became effective April, 1997, requires financial assurance regarding closure and postclosure care. This assurance was most recently provided, on March 30, 2004, by the City’s Chief Financial Officer placing in the Fresh Kills landfill operating record representations in satisfaction of the Local Government Financial Test. The City has five inactive hazardous waste sites not covered by the EPA rule. The City has recorded the long-term liability for these postclosure care costs in the government-wide financial statements. The following represents the City’s total landfill and hazardous waste sites liability which is recorded in the government-wide statement of net assets: ______Amount (in thousands) Landfill ...... $1,157,115* Hazardous waste sites ...... ______194,017 Total landfill and hazardous waste sites liability ...... $1,351,132______

* Since September 11, 2001, the diversion of debris from the World Trade Center’s destruction to Fresh Kills did not have a significant impact on the closure cost estimates.

B-74 NOTES TO FINANCIAL STATEMENTS, Continued

6. Interfund Receivables and Payables

At June 30, 2004 and 2003, primary government and discretely presented component unit receivable and payable balances were as follows: Governmental activities:

Due from/to other funds:

______Receivable Fund ______Payable Fund ______2004 ______2003 (in thousands) General Fund: NYC Capital Projects Fund ...... $2,813,173(1) $2,813,173(1) General Debt Service Fund ...... ______7,408 ______7,408 ______2,820,581 ______2,820,581

NYC Capital Projects Fund General Fund ...... ______1,268,368(1) ______1,571,928(1)

General Debt Service Fund: General Fund ...... — 110,000 NYC Capital Projects Fund ...... ______— ______38,355 ______— ______148,355

Total due from/to other funds ...... ______4,088,949 ______4,540,864

Component units:

Due from/to primary government and component units:

______Receivable Entity ______Payable Entity Primary government—General Fund: Component units: HDC ...... 414,183 372,293 OTB ...... ______270 ______304 ______414,453 ______372,597 Primary government—NYC Capital Projects Fund Component unit—Water Authority ...... ______451,162 ______231,391 Total due from component units ...... ______865,615 ______603,988 Component unit—Water Board Primary government—General Fund ...... ______3,323 ______13,213 Total due to component units ...... ______3,323 ______13,213 Total due from/to primary government and component units ...... ______868,938 ______617,201 Total primary government and component units receivable and payable balances ...... $4,957,887______$5,158,065______

(1) Net of eliminations within the same fund type. Note: During both fiscal years 2004 and 2003, the New York City Capital Projects Fund reimbursed the General Fund for expenditures made on its behalf.

B-75 NOTES TO FINANCIAL STATEMENTS, Continued

E. Other Information

1. Audit Responsibility

Except where otherwise noted, in fiscal years 2004 and 2003, respectively, the separately administered organizations included in the financial statements of the City audited by auditors other than Deloitte & Touche LLP are the Municipal Assistance Corporation for The City of New York, New York City Transitional Finance Authority, New York City Educational Construction Fund (2003), New York City School Construction Authority, New York City Health and Hospitals Corporation, New York City Off-Track Betting Corporation, Jay Street Development Corporation, New York City Housing Development Corporation, New York City Industrial Development Agency, New York City Economic Development Corporation, Business Relocation Assistance Corporation, Brooklyn Navy Yard Development Corporation, New York City Water Board and New York City Municipal Water Finance Authority, and the Deferred Compensation Plans. The following describes the proportion of certain key financial information that is audited by other auditors in fiscal years 2004 and 2003:

______Government-wide ______Fund-based Governmental Component Nonmajor Pension and Other ______Activities ______Units Governmental______Funds ______Employee Benefit Trust Funds ______2004 ______2003 ______2004 ______2003 ______2004 ______2003 ______2004 ______2003 (percent) Total assets ...... 6 7 82 81 81 83 5 4 Revenues / additions (deductions) and other financing sources ...... 4 6 75 73 95 93 8 1

2. Subsequent Events

Subsequent to June 30, 2004, the City: completed the following long-term financing; entered into certain derivatives; exercised a ground lease purchase option; and added a blended component unit to its financial reporting entity. Long-term Financing

City Debt: On July 29, 2004, the City sold its Series A and B bonds of $586.8 million for refunding purposes. On August 18, 2004, the City sold its Series C bonds of $730.0 million for the financing of capital expenditures.

Derivatives

Consumer Price Index (CPI) Swap: On July 29, 2004, the City entered into two $25 million CPI index swaps, with terminations in 2013 and 2014, because the resulting synthetic fixed rate was lower than that available with traditional fixed rate bonds. To execute these transactions, the City issued variable rate bonds referenced to a 80 basis points spread to the CPI index. The City also entered into two CPI swaps in which it receives a variable rate equal to that on its underlying bonds and pays fixed rates of 4.01% (2013 termination) and 4.12% (2014 termination), respectively. These synthetic fixed rates were five to ten basis points below traditional fixed rate bonds at the time of the transaction.

B-76 NOTES TO FINANCIAL STATEMENTS, Continued

Enhanced Basis Swap: On August 1, 2004, the City entered into a $500.0 million basis swap in which it pays a floating rate equivalent to the BMA index and receives a floating rate in which the percentage of LIBOR paid by the counterparty depends on the rate at which LIBOR trades. The different percentages of LIBOR to be received by the City based on the corresponding trading level of LIBOR are detailed in the following table:

______Libor on Reset Date ______Percentage of Libor Less than 2.0% ...... 95.1% Greater than or equal to 2.0%, but less than 3.45% ...... 85.1 Greater than or equal to 3.45%, but less than 4.45% ...... 77.1 Greater than or equal to 4.45%, but less than 5.85% ...... 72.1 Greater than or equal to 5.85%, but less than 6.85% ...... 69.1 Greater than or equal to 6.85%, but less than 8.25% ...... 67.1 Greater than or equal to 8.25% ...... 63.1 The City entered into this transaction, in which the counterparty made an upfront cash payment of $20.6 million, because the basis risk was mitigated by the high percentages of LIBOR that the City would receive. The highest percentage of LIBOR, 95.1%, occurs when LIBOR on Reset Date is below 2.0%. This low rate level typically compresses the relationship between LIBOR and BMA, but 95.1% is a significant premium to current trading levels. Also, LIBOR on Reset Date must rise above 5.84% before the City would receive a lower percentage of LIBOR than its ten-year historical average of 69.2%.

Capital Asset

Land: On July 26, 2004, the City gave notice to 330 Jay Street Associates, LLC (the Landlord) of the City’s exercise of the option under the Ground Lease to purchase the Landlord’s undivided interest in the land appurtenant to the Court Unit at Jay Street in Brooklyn, New York upon substantial completion of the Courts Facility. The proposed closing date is March 31, 2005. The purchase price is $23.6 million, less the Base Rent paid to the Landlord by the City until the closing date.

Component Unit

Fiscal Year 2005 Securitization Corporation (FYSC): On September 22, 2004, the FYSC was established as a not-for-profit local development corporation according to the not-for-profit corporation law of the State of New York. FYSC was formed to lessen the burdens of City government and to act in the public interest by its empowerment to issue and sell bonds, notes, and other obligations to finance the retirement of certain general obligations of the City, to provide additional funds to the City, to pay financing costs, and to pay operating expenses.

B-77 NOTES TO FINANCIAL STATEMENTS, Continued

3. Other Employee Benefit Trust Funds Deferred Compensation Plans For Employees of The City of New York and Related Agencies and Instrumentalities (DCP)

The City offers its employees deferred compensation plans created in accordance with Internal Revenue Code Sections 457 and 401(k). DCP is available to certain employees of The City of New York and related agencies and instrumentalities. DCP permits employees to defer a portion of their salary until future years. The compensation deferred is not available to employees until termination, retirement, death, or unforeseen emergency or hardship (as defined by the Internal Revenue Code). Amounts maintained under a deferred compensation plan by a state or local government are to be held in trust (or in a custodial account) for the exclusive benefit of plan participants and their beneficiaries. Consequently, each plan is presented as an Other Employee Benefit Trust Fund in the City’s financial statements. Participants in DCP can choose among seven investment options, or one of four pre-arranged portfolios consisting of varying percentages of those investment options.

4. Other Postemployment Benefits

In accordance with collective bargaining agreements, the City provides Other Postemployment Benefits (OPEB) which include basic medical and hospitalization (health care) benefits to eligible retirees and dependents at no cost to 95.0% of the participants. Basic health care premium costs which are partially paid by the remaining participants vary according to the terms of their elected plans. To qualify, retirees must: (i) have worked for the City with at least five years of credited service as a member of an approved pension system (requirement does not apply if retirement is as a result of accidental disability); (ii) have been employed by the City or a City related agency prior to retirement; (iii) have worked regularly for at least twenty hours a week prior to retirement; and (iv) be receiving a pension check from a retirement system maintained by the City or another system approved by the City. Amounts related to OPEB expenditures are recognized when paid. The City also provides reimbursement to eligible City retirees and their dependents for the Part B Medicare premium. Retirees and their dependents must be enrolled in the Medicare Part B program in order to receive reimbursement. Each eligible retiree and dependent receives a reimbursement of $58.70 per month. The amounts expended for health care benefits for fiscal years 2004 and 2003 are as follows:

______2004 ______2003 ______Active______Retired______Active _ Retired______Number of employees ...... ______335,359 ______201,475 ______342,986 ______194,311

Cost of health care (in thousands)* ...... $1,988,738______$869,499______$1,858,959______$792,393______

* The amounts reflected are based on average headcounts. In addition, the City sponsors a supplemental (Superimposed Major Medical) benefit plan for City managerial employees to refund medical and hospital bills that are not reimbursed by the regular health insurance carriers. The amounts expended for supplemental benefits for fiscal years 2004 and 2003 are as follows:

______2004 ______2003 ______Active______Retired______Active______Retired Number of claims ...... ______23,056 ______8,814 ______20,475 ______7,254

Cost of Superimposed Major Medical (in thousands)* . . . . . $______3,086 $1,387______$______2,363 $______964

* Costs are based on reported claims and include a provision for estimated claims incurred but not yet reported.

B-78 NOTES TO FINANCIAL STATEMENTS, Continued

5. Pension and Other Employee Benefit Trust Funds Pension Systems Plan Descriptions

The City sponsors or participates in pension systems providing benefits to its employees. The pension systems function in accordance with existing State statutes and City laws. Each system combines features of a defined benefit pension plan with those of a defined contribution pension plan. Contributions are made by the employers and the members. The majority of City employees are members of one of the following five major actuarially-funded pension systems (Systems) collectively known as the New York City Retirement Systems (NYCRS): 1. New York City Employees’ Retirement System (NYCERS), a cost-sharing, multiple-employer public employee retirement system, for employees of the City not covered by one of the other pension systems and employees of certain component units of the City and certain other government units. 2. New York City Teachers’ Retirement System-Qualified Pension Plan (TRS), a cost-sharing, multiple-employer public employee retirement system, for teachers in the public schools of the City and Charter Schools and certain other specified school and college employees. 3. New York City Board of Education Retirement System-Qualified Pension Plan (BERS), a cost-sharing, multiple- employer public employee retirement system, for nonpedagogical employees of the Department of Education and Charter Schools and certain employees of the School Construction Authority. 4. New York City Police Pension Fund (POLICE), a single-employer public employee retirement system, for full-time uniformed employees of the Police Department. Note: In conjunction with the establishment of an administrative staff separate from the New York City Police Department in accordance with Chapter 292 of the Laws of 2001, the New York City Police Department, Subchapter Two Pension Fund is generally being referred to herein as the New York City Police Pension Fund as set forth in the Administrative Code of The City of New York (ACNY) Section 13-214.1. 5. New York City Fire Pension Fund (FIRE), a single-employer public employee retirement system, for full-time uniformed employees of the Fire Department. Note: The New York City Fire Department, Subchapter Two Pension Fund is generally being referred to herein as the New York City Fire Pension Fund as set forth in ACNY Section 13-313.1. The actuarially-funded pension systems provide pension benefits to retired employees based on salary and length of service. In addition, the actuarially-funded pension systems provide automatic Cost-of-Living Adjustments (COLA) and other supplemental pension benefits to certain retirees and beneficiaries. In the event of disability during employment, participants may receive retirement allowances based on satisfaction of certain service requirements and other provisions. The actuarially-funded pension systems also provide death benefits. Subject to certain conditions, members become fully vested as to benefits upon the completion of 5 years of service. Except for NYCERS, permanent, full-time employees are generally required to become members of the Systems upon employment. Permanent full-time employees who are eligible to participate in NYCERS are required to become members within six months of their permanent employment status but may elect to become members earlier. Other employees who are eligible to participate in NYCERS and BERS may become members at their option. Upon termination of employment before retirement, certain members are entitled to refunds of their own contributions, including accumulated interest, less any outstanding loan balances.

B-79 NOTES TO FINANCIAL STATEMENTS, Continued

Plan Membership

At June 30, 2003 and 2002, the membership of NYCRS consisted of:

______2003 ______NYCERS ______TRS ______BERS ______POLICE ______FIRE ______TOTAL Retirees and beneficiaries receiving benefits ...... 128,025 58,133 10,983 38,260 17,409 252,810 Terminated vested members not yet receiving benefits . . 4,592 4,307 173 490 16 9,578 Active members ...... 173,434______97,986 _21,678______35,841______10,860______339,799______Total plan membership ...... 306,051______160,426______32,834______74,591______28,285______602,187______

______2002 ______NYCERS ______TRS ______BERS ______POLICE ______FIRE ______TOTAL Retirees and beneficiaries receiving benefits ...... 123,477 54,562 10,275 37,263 16,715 242,292 Terminated vested members not yet receiving benefits . . 3,815 3,981 157 408 14 8,375 Active members ...... 177,511______95,678 _25,253______36,536______11,271______346,249______Total plan membership ...... 304,803______154,221______35,685______74,207______28,000______596,916______Funding Policy

The City’s funding policy is to contribute statutorily-required contributions (statutory contributions). Together with member contributions and investment income these statutory contributions would ultimately be sufficient to pay benefits when due. Statutory contributions for NYCRS, determined by the Actuary in accordance with State statutes and City laws, are generally funded by the employers within the appropriate fiscal year. Member contributions are established by law and vary by Plan. In general, Tier I and Tier II member contribution rates are dependent upon the employee’s age at membership and retirement plan election. In general, Tier III and Tier IV members make basic contributions of 3.0% of salary regardless of age at membership. Effective October 1, 2000, in accordance with Chapter 126 of the Laws of 2000, these members, except for certain Transit Authority employees, are not required to make contributions after the 10th anniversary of their membership date or completion of ten years of credited service, whichever is earlier. Effective December, 2000, certain Transit Authority Tier III and Tier IV members make basic contributions of 2.0% of salary in accordance with Chapter 10 of the Laws of 2000. Certain members of NYCERS and BERS also make additional member contributions. During the Spring 2000 session, the New York State Legislature approved and the Governor signed laws which provide a COLA for retirees (Chapter 125 of the Laws of 2000), additional service credits for certain Tier I and Tier II members, reduced member contributions for certain Tier III and Tier IV members (Chapter 126 of the Laws of 2000) and several other changes in benefits for various groups. Except for the statutory limitations for funding COLA benefits, these benefit enhancements are fully reflected in the actuarial valuations as of June 30, 2003, 2002, 2001, and 2000. Annual Pension Costs

The annual pension costs and the City’s statutory contributions for fiscal year 2004 were determined as part of the June 30, 2003 actuarial valuations on the basis of current actuarial assumptions and methods including the Frozen Initial Liability Actuarial Cost Method.

B-80 NOTES TO FINANCIAL STATEMENTS, Continued

The annual pension costs for the NYCRS, for the fiscal years ended June 30, 2004, 2003, and 2002, were as follows:

______2004 ______2003 ______2002 (in millions) NYCERS ...... $ 542.2 $ 197.8 $ 105.7 TRS ...... 1,015.3 805.8 607.8 BERS ...... 95.0 87.9 66.7 POLICE ...... 902.7 813.1 631.9 FIRE ...... ______424.5 ______387.0 ______344.5 Total annual pension costs ...... $2,979.7______$2,291.6______$1,756.6______For fiscal year 2004, the City’s statutory contributions for the NYCRS, based on the actuarial valuations performed as of June 30, 2003, plus other pension expenditures, were approximately $2,444.5 million. These statutory contributions were less than the annual pension costs computed in accordance with Governmental Accounting Standards Board Statement No. 27 (GASB27). The annual pension costs, computed in accordance with GASB27 and consistent with generally accepted actuarial principles, are greater than the statutory contributions primarily because (1) the City is only one of the participating employers in NYCERS, TRS, and BERS and (2) Chapter 125 of the Laws of 2000 (Chapter 125/00), as later modified by Chapter 278 of the Laws of 2002 (Chapter 278/02), provides for a phase-in schedule for funding the additional actuarial liabilities created by the benefits provided by Chapter 125/00. Specifically, in accordance with Chapter 125/00, the Actuary for NYCRS, in calculating the statutory contributions for fiscal years 2001 and 2002, included the following percentages of the increase in actuarial liabilities attributable to the Chapter 125/00 COLA benefits:

Phase-In______Percent ______Fiscal Year 20% 2001 40 2002 Chapter 278/02 revised the phase-in schedule for fiscal years 2003 and later. Chapter 278/02 required the Actuary to revise the methodology and timing for determining the statutory contributions on account of the additional actuarial liabilities attributable to the benefits provided under Chapter 125/00 by extending the phase-in period for funding these liabilities from five years to ten years. Chapter 278/02 provided that, for the June 30, 2000 actuarial valuation, the Actuary is to recognize, on a theoretical basis only, 10% of the additional actuarial liabilities attributable to Chapter 125/00 for determining fiscal year 2001 employer contributions. For each of the next eight June 30 actuarial valuations (i.e., June 30, 2001 to June 30, 2008), the Actuary is required to recognize progressively increasing percentages (i.e., 20% to 90%) of the additional actuarial liabilities attributable to the benefits funded by Chapter 125/00 for determining employer contributions for fiscal years 2002 to 2009. For the June 30, 2009 and later actuarial valuations, the Actuary is required to recognize the full amount of the additional actuarial liabilities attributable to Chapter 125/00 for determining fiscal years 2010 and later employer contributions. Because the fiscal years 2002 and 2001 accounting periods are closed and Chapter 278/02 had a retroactive effect, the interest- adjusted difference between employer contributions actually paid for fiscal years 2002 and 2001 under Chapter 125/00 and the amounts that would have been payable under the ten-year phase-in schedule for such fiscal years was deducted from the otherwise required employer contributions for fiscal year 2003. The impact of the ten-year phase-in of Chapter 278/02 is to postpone funding of the additional actuarial liabilities attributable to Chapter 125/00 resulting in increased employer contributions in later years.

B-81 NOTES TO FINANCIAL STATEMENTS, Continued

The City’s statutory contributions for the fiscal years ended June 30, 2004, 2003, and 2002 were as follows:

______2004 ______2003 ______2002 (in millions) NYCERS* ...... $ 166.0 $ 50.7 $ 50.0 TRS* ...... 908.0 629.6 500.8 BERS* ...... 80.9 67.1 54.5 POLICE ...... 812.0 625.4 534.5 FIRE ...... 392.7 317.0 302.3 OTHER** ...... ______84.9 ______60.8 ______49.8 Total actual pension contributions ...... $2,444.5______$1,750.6______$1,491.9______

* NYCERS, TRS, and BERS are cost-sharing, multiple-employer public employee retirement systems. The City’s statutory contributions as a percentage of the total statutory contributions (calculated on a basis reflecting the phase-in of liabilities required under Chapter 278/02 and Chapter 125/00) for all employers participating in NYCERS, TRS, and BERS for fiscal years ended June 30, 2004, 2003, and 2002 were:

______2004 ______2003 ______2002 NYCERS ...... 53.44% 46.95% 47.30% TRS ...... 98.67 98.44 98.21 BERS ...... 96.28 95.53 96.44 In accordance with GASB27, the City’s obligation for NYCERS, TRS, and BERS is fulfilled by paying its portion of the total statutory contributions determined.

** Other pension expenditures represent contributions to other actuarial and pay-as-you-go pension systems for certain employees, retirees, and beneficiaries not covered by any of NYCRS. The City also contributes per diem amounts into certain union-administered annuity funds. Net Pension Obligations

NYCERS, TRS, and BERS are cost-sharing, multiple-employer public employee retirement systems and the City has no net pension obligations to these systems. Note: The annual pension costs for these systems are the actuarially-required contributions. POLICE and FIRE are single-employer public employee retirement systems and the City’s net pension obligations for fiscal year 2004 are as follows:

______POLICE ______FIRE ______TOTAL (in millions) (1) Annual Required Contribution ...... $917.7 $427.7 $1,345.4 (2) Interest on Net Pension Obligation ...... 33.3 13.6 46.9 (3) Adjustment to Annual Required Contribution ...... ______48.3 ______16.8______65.1 (4) Annual Pension Cost=(1)+(2)-(3) ...... 902.7 424.5 1,327.2 (5) Statutory Contribution ...... ______812.0 ______392.7______1,204.7 (6) Increase in Net Pension Obligation=(4)-(5) ...... 90.7 31.8 122.5 (7) Net Pension Obligation Beginning of Year ...... ______415.7 ______169.8______585.5 (8) Net Pension Obligation End of Year=(6)+(7) ...... ______$506.4 ______$201.6______$ 708.0

B-82 NOTES TO FINANCIAL STATEMENTS, Continued

The following is three-year trend information for the City’s actuarially-funded, single-employer pension plans:

Fiscal Annual Percentage Net Year Pension Of APC Pension ______Ending Cost______(APC) ______Contributed ______Obligation (in millions) POLICE ...... 6/30/04 $902.7 90% $506.4 6/30/03 813.1 77 415.7 6/30/02 631.9 85 228.0 FIRE ...... 6/30/04 424.5 93 201.6 6/30/03 387.0 82 169.8 6/30/02 344.5 88 99.8 Actuarial Assumptions and Methods The more significant actuarial assumptions and methods used in the calculations of employer contributions to the actuarial pension systems for the fiscal years ending June 30, 2004 and 2003 are as follows:

______2004 ______2003______Valuation Date ...... June 30, 2003. June 30, 2002. Actuarial Cost Method(1) ...... Frozen Initial Liability. Frozen Initial Liability. Amortization Method for ...... Increasing dollar for FIRE. (2) Level Increasing dollar for FIRE.(2) Level Unfunded Actuarial Accrued dollar for UAAL attributable to NYCERS dollar for UAAL attributable to Liabilities (UAAL) and TRS 1999 Early Retirement Incentive NYCERS and TRS 1999 Early (ERI) NYCERS 2000 ERI and BERS, Retirement Incentive (ERI) and NYCERS and TRS 2002 ERI (Part A only). NYCERS 2000 ERI.(3) All outstanding (3) All outstanding components of UAAL components of UAAL are being are being amortized over closed periods. amortized over closed periods. Remaining Amortization Period . . . . 7 years for FIRE(2) and 2 years for 1999 8 years for FIRE(2), 3 years for 1999 ERI, 3 years for 2000 ERI and 5 years for ERI and 4 years for 2000 ERI. 2002 ERI (Part A only). Actuarial Asset Valuation Method . . Modified 5-year moving average of Modified 5-year moving average of Market Value with Market Value Restart Market Value with Market Value as of June 30, 1999. Restart as of June 30, 1999. Investment Rate of Return ...... 8.0% per annum(4) (4.0% per annum for 8.0% per annum(4) (4.0% per annum benefits payable under the variable for benefits payable under the variable annuity programs of TRS and BERS). annuity programs of TRS and BERS). Post-Retirement Mortality ...... Tables based on recent experience. Tables based on recent experience. Active Service: Withdrawal, ...... Tables based on recent experience. Tables based on recent experience. Death, Disability, Retirement Salary Increases ...... In general, Merit and Promotion In general, Merit and Promotion Increases plus assumed General Wage Increases plus assumed General Wage Increases of 3.0% per year.(4) Increases of 3.0% per year.(4) Cost-of-Living Adjustments ...... 1.3% per annum.(4) 1.3% per annum.(4)

(1) Under the Frozen Initial Liability Actuarial Cost Method, the excess of the actuarial present value of projected benefits of the membership as of the valuation date, over the sum of the actuarial value of assets plus the present value of UAAL, if any, and the present value of future employee contributions is allocated on a level basis over the future earnings of members who are on the payroll as of the valuation date. The Initial Liability was reestablished by the Entry Age Actuarial Cost Method as of June 30, 1999 but with the UAAL not less than $0. Actuarial gains and losses are reflected in the employer normal contribution rate. (2) In conjunction with Chapter 85 of the Laws of 2000 (Chapter 85/00), there is an amortization method. However, the initial UAAL of NYCERS, TRS, BERS, and POLICE equal $0 and no amortization periods are required. (3) Laws established UAAL for Early Retirement Incentive Programs to be amortized on a level dollar basis over periods of 5 years. (4) Developed assuming a long-term Consumer Price Inflation assumption of 2.5% per year.

B-83 NOTES TO FINANCIAL STATEMENTS, Continued

Pursuant to Section 96 of the New York City Charter, a study of the actuarial assumptions used to value liabilities of the five actuarially- funded NYCRS is conducted by an independent actuarial firm every two years. One such study was completed in October, 1999 and, based upon the results and recommendations of that study, the Actuary for NYCRS proposed changes in actuarial assumptions and methods to be used for fiscal years beginning on and after July 1, 1999 (i.e., fiscal year 2000). Where required, the Boards of Trustees of NYCRS adopted those changes to the actuarial assumptions and methods that required Board approval and the New York State Legislature and the Governor enacted Chapter 85/00 to provide for those changes to the actuarial assumptions and methods that required legislation, including the investment rate of return assumption of 8.0% per annum. The most recent study was published by Gabriel, Roeder, Smith & Company (GRS) dated October, 2003 and analyzed experience for fiscal years 1998 through 2001. The Actuary is currently reviewing this study and may recommend changes to the actuarial assumptions and methods to be used to determine employer contributions for fiscal year 2005. The Actuarial Asset Valuation Method (AAVM) was changed as of June 30, 1999 to reflect a market basis for investments held by the Plan and was made as one component of an overall revision of actuarial assumptions and methods as of June 30, 1999. Under this AAVM, the Actuarial Asset Value (AAV) was reset to Market Value (i.e., Market Value Restart as of June 30, 1999). Prior to June 30, 1999, this AAVM recognized expected investment returns immediately and phased-in investment returns greater or less than expected (i.e., Unexpected Investment Returns (UIR) over five years at a rate of 10%, 15%, 20%, 25%, and 30% per year or at a cumulative rate of 10%, 25%, 45%, 70%, and 100% over five years). Under AAVM, any UIR for fiscal years 2000 and later are phased into AAV beginning the following June 30 at a rate of 10%, 15%, 20%, 25%, and 30% per year (or at a cumulative rate of 10%, 25%, 45%, 70%, and 100% over five years). Chapter 85/00 reestablished UAAL and eliminated the Balance Sheet Liability (BSL) for actuarial purposes as of June 30, 1999. The schedule of payments toward the reestablished UAAL provides that UAAL, if any, be amortized over a period of 11 years beginning fiscal year 2000, where each annual payment after the first equals 103% of its preceding annual payment. Chapter 70 of the Laws of 1999 established UAAL as of June 30, 2000 for an Early Retirement Incentive Program to be amortized on a level basis over a period of 5 years beginning in fiscal year 2001. Chapter 86 of the Laws of 2000 established UAAL as of June 30, 2001 for an Early Retirement Incentive Program to be amortized on a level basis over a period of 5 years beginning in fiscal year 2002. Chapter 69 of the Laws of 2002 established UAAL as of June 30, 2003 for an Early Retirement Incentive Program (Part A only) to be amortized on a level basis over a period of 5 years beginning in fiscal year 2004. Other Employee Benefit Trust Funds Fund Descriptions

Per enabling State legislation, certain retirees of POLICE, FIRE, and NYCERS are eligible to receive scheduled supplemental benefits from certain Variable Supplements Funds (VSFs). Under current law, VSFs are not to be construed as constituting pension or retirement system funds. Instead, they provide scheduled supplemental payments, other than pension or retirement system allowances, in accordance with applicable statutory provisions. While a portion of these payments are guaranteed by the City, the Legislature has reserved to itself and the State of New York, the right and power to amend, modify, or repeal VSFs and the payments they provide. POLICE administers the Police Officers’ Variable Supplements Fund (POVSF) and the Police Superior Officers’ Variable Supplements Fund (PSOVSF). These funds operate pursuant to the provisions of Title 13, Chapter 2 of ACNY. 1. POVSF provides supplemental benefits to members who retire from POLICE for service (with 20 or more years) as police officers and who retired on or after October 1, 1968.

2. PSOVSF provides supplemental benefits to members who retire from POLICE for service (with 20 or more years) holding the rank of sergeant or higher, or detective and who retired on or after October 1, 1968. FIRE administers the Firefighters’ Variable Supplements Fund (FFVSF) and the Fire Officers’ Variable Supplements Fund (FOVSF). These funds operate pursuant to the provisions of Title 13, Chapter 3 of ACNY.

B-84 NOTES TO FINANCIAL STATEMENTS, Continued

3. FFVSF provides supplemental benefits to members who retire from FIRE for service (with 20 or more years) as firefighters (or wipers) and who retired on or after October 1, 1968. 4. FOVSF provides supplemental benefits to members who retire from FIRE for service (with 20 or more years) holding the rank of lieutenant or higher and all pilots and marine engineers (uniformed) and who retired on or after October 1, 1968. The New York City Employees’ Retirement System administers the Transit Police Officers’Variable Supplements Fund (TPOVSF), the Transit Police Superior Officers’Variable Supplements Fund (TPSOVSF), the Housing Police Officers’Variable Supplements Fund (HPOVSF), the Housing Police Superior Officers’Variable Supplements Fund (HPSOVSF) and the Correction Officers’Variable Supplements Fund (COVSF). These funds operate pursuant to the provisions of Title 13, Chapter 1 of ACNY. 5. TPOVSF provides supplemental benefits to members who retire from NYCERS for service (with 20 or more years) as Transit Police Officers on or after July 1, 1987. This plan provides for a schedule of defined supplemental benefits that became guaranteed by the City as a consequence of calculations performed by the Actuary during November, 1993. With the passage of Chapter 255 of the Laws of 2000, NYCERS will be required to transfer assets to TPOVSF whenever the assets of TPOVSF are not sufficient to pay benefits. 6. TPSOVSF provides supplemental benefits to members who retire from NYCERS for service (with 20 or more years) as Transit Police Superior Officers on or after July 1, 1987. This plan provides for a schedule of defined supplemental benefits that, effective calendar year 2001, as a result of the enactment of Chapter 255 of the Laws of 2000, became guaranteed by the City. In addition, with the passage of Chapter 255 of the Laws of 2000, NYCERS will be required to transfer assets to TPSOVSF whenever the assets of TPSOVSF are not sufficient to pay benefits. As a result of insufficient fund assets to pay benefits as of June 30, 2004, NYCERS is required to transfer assets so that the fund can meet its benefit obligations when due. 7. HPOVSF provides supplemental benefits to members who retire from NYCERS for service (with 20 or more years) as Housing Police Officers on or after July 1, 1987. This plan provides for a schedule of defined supplemental benefits that became guaranteed by the City as a consequence of Chapter 719 of the Laws of 1994. With the passage of Chapter 255 of the Laws of 2000, NYCERS will be required to transfer assets to HPOVSF whenever the assets of HPOVSF are not sufficient to pay benefits. 8. HPSOVSF provides supplemental benefits to members who retire from NYCERS for service (with 20 or more years) as Housing Police Superior Officers on or after July 1, 1987. This plan provides for a schedule of defined supplemental benefits that, effective calendar year 2001, as a result of the enactment of Chapter 255 of the Laws of 2000, became guaranteed by the City. In addition, with the passage of Chapter 255 of the Laws of 2000, NYCERS will be required to transfer assets to HPSOVSF whenever the assets of HPSOVSF are not sufficient to pay benefits. As a result of insufficient fund assets to pay benefits as of June 30, 2001, NYCERS is required to transfer assets so that the fund can meet its benefit obligations when due. 9. COVSF provides supplemental benefits to members who retire from NYCERS for service (with 20 or 25 years of service, depending upon the plan) as members of the Uniformed Correction Force on or after July 1, 1999. However, prior to calendar year 2019, when this plan provides for a guaranteed schedule of defined supplemental benefits, total supplemental benefits paid are limited to the assets of the fund. Funding Policy and Contributions The Administrative Code of The City of New York provides that POLICE and FIRE transfer to their respective VSFs amounts equal to certain excess earnings on equity investments, generally limited to the unfunded accumulated benefit obligation for each VSF. The excess earnings are defined as the amount by which earnings on equity investments exceed what the earnings would have been had such funds been invested at a yield comparable to that available from fixed income securities, less any cumulative deficiencies. ACNY provides that NYCERS transfer to COVSF amounts equal to certain excess earnings on equity investments, less any cumulative deficiencies. ACNY also provides, as a consequence of Chapter 255 of the Laws of 2000, that NYCERS make the required transfers to TPOVSF, TPSOVSF, HPOVSF, and HPSOVSF as necessary in the event their assets are depleted, sufficient to meet their annual benefit payments. For fiscal years 2004 and 2003, no excess earnings on equity investments are estimated to be transferable to VSFs. For both fiscal years 2004 and 2003, required transfers from NYCERS of approximately $2.2 million were made to the HPSOVSF. As of June 30, 2004, NYCERS has accrued approximately $1.1 million and $.8 million toward the amounts expected to be transferred to HPSOVSF and TPSOVSF, respectively, to meet the December, 2004 benefit obligations of those funds.

B-85 NOTES TO FINANCIAL STATEMENTS, Continued

Required Supplementary Information (Unaudited)

The schedule of funding progress presents the following information for each of the past five consecutive fiscal years for each of NYCRS: the actuarial valuation date, the actuarial asset value, the actuarial accrued liability, the unfunded actuarial accrued liability, the actuarial asset value as a percentage of the actuarial accrued liability (funded ratio), the annual covered payroll and the ratio of the unfunded actuarial accrued liability to annual covered payroll. All actuarially determined information has been calculated in accordance with the actuarial assumptions and methods reflected in the actuarial valuations as of June 30, 2003, 2002, 2001, 2000, and 1999. Required Supplementary Information (Unaudited) (1) (2) (3) (4) (5) (6) Actuarial Unfunded Actuarial Accrued Actuarial Accrued UAAL as a Valuation Asset Liability Liability Funded Covered Percentage of ______Date ______Value (AAV) ______(AAL)* ______(UAAL)(c) ______Ratio ______Payroll Covered______Payroll (a) (a) & (b) (2) - (1) (1) ÷ (2) (3) ÷ (5) (in millions) NYCERS ...... 6/30/03 $42,056.0 $42,244.2 $188.2 99.6% $8,807.6 2.1% 6/30/02 43,561.1 43,619.9 58.8 99.9 8,901.1 0.7 6/30/01 43,015.4 43,087.6 72.2 99.8 8,515.3 0.8 6/30/00 42,393.6 42,418.7 25.1 99.9 7,871.0 0.3 6/30/99 40,936.0 40,936.0 0.0 100.0 7,593.2 0.0 TRS ...... 6/30/03 33,169.2 33,182.6 13.4 100.0 5,828.8 0.2 6/30/02 34,177.8 34,181.1 3.3 100.0 5,469.2 0.1 6/30/01 35,410.2 35,414.5 4.3 100.0 5,015.4 0.1 6/30/00 36,142.4 36,147.5 5.1 100.0 4,721.5 0.1 6/30/99 34,626.1 34,626.1 0.0 100.0 4,217.6 0.0 BERS ...... 6/30/03 1,833.8 1,842.0 8.2 99.6 651.0 1.3 6/30/02 1,835.8 1,835.8 0.0 100.0 736.7 0.0 6/30/01 1,781.7 1,781.7 0.0 100.0 694.2 0.0 6/30/00 1,749.4 1,749.4 0.0 100.0 666.0 0.0 6/30/99 1,705.4 1,705.4 0.0 100.0 592.2 0.0 POLICE ...... 6/30/03 18,781.4 18,781.4 0.0 100.0 2,433.9 0.0 6/30/02 18,913.6 18,913.6 0.0 100.0 2,496.2 0.0 6/30/01 18,141.7 18,141.7 0.0 100.0 2,500.1 0.0 6/30/00 17,601.9 17,601.9 0.0 100.0 2,465.7 0.0 6/30/99 16,877.8 16,877.8 0.0 100.0 2,332.0 0.0 FIRE ...... 6/30/03 6,441.5 6,558.0 116.5 98.2 748.8 15.6 6/30/02 6,612.3 6,738.7 126.4 98.1 789.7 16.0 6/30/01 6,525.7 6,660.7 135.0 98.0 799.2 16.9 6/30/00 6,388.1 6,530.6 142.5 97.8 741.5 19.2 6/30/99 6,179.8 6,328.7 148.9 97.6 729.7 20.4

* Frozen Initial Liability (a) Revised economic and non-economic assumptions due to experience review as of June 30, 1999. The Actuarial Asset Valuation Method (AAVM) was changed as of June 30, 1999 to reflect a market basis for investments held by the Plan and was made as one component of an overall revision of actuarial assumptions and methods as of June 30, 1999. Under AAVM, any UIR for fiscal years 2000 and later are phased into AAV beginning the following June 30 at a rate of 10%, 15%, 20%, 25%, and 30% per year (or at a cumulative rate of 10%, 25%, 45%, 70%, and 100% over five years). (b) To effectively assess the funding progress of a Plan, it is necessary to compare AAV and AAL calculated in a manner consistent with the Plan’s funding method over a period of time. AAL is the portion of the actuarial present value of pension plan benefits and expenses which is not provided for by future employer normal costs and future member contributions. (c) UAAL is the excess of AAL over AAV. This is the same as the unfunded frozen actuarial accrued liability which is not adjusted from one actuarial valuation to the next to reflect actuarial gains and losses.

B-86 NOTES TO FINANCIAL STATEMENTS, Continued

6. World Trade Center Attack

On September 11, 2001, two hijacked passenger jetliners flew into the World Trade Center, resulting in a substantial loss of life, destruction of the World Trade Center, and damage to other buildings in the vicinity. Trading on the major New York stock exchanges was suspended until September 17, 2001, and business in the financial district was interrupted. Continuing recovery, clean up, and repair efforts have resulted in substantial expenditures. The City has been largely reimbursed by the Federal government for all of its direct costs for response and remediation of the World Trade Center site. In addition, the State authorized TFA to have outstanding $2.5 billion of bonds (Recovery Bonds) and notes (Recovery Notes) to pay costs (Recovery Costs) related to or arising from the September 11 attack, of which TFA currently has outstanding approximately $2.0 billion. It is not possible to quantify at present with any certainty the long-term impact of the September 11 attack on the City and its economy.

B-87 [THIS PAGE INTENTIONALLY LEFT BLANK.] APPENDIX C

BONDS TO BE REDEEMED The City expects to redeem City bonds, at or prior to maturity, by applying a portion of the proceeds of the Series P and Series Q Bonds to provide for the payment of the principal of and interest and redemption premium, if any, on such bonds to the extent and to the payment dates set forth below. The refunding is contingent upon the delivery of the Bonds. The bonds are being provided for in whole or in part as indicated in the notes. Refunded bonds that are to be paid at maturity which are redeemable by their terms, if any, may be called for redemption at the option of the City if the escrow account is hereafter restructured to provide for their redemption. Any such restructuring must preserve (a) the sufficiency of the escrow account to pay the principal, interest to maturity or redemption, and any redemption premium on all refunded bonds and (b) the exclusion from gross income for federal income tax purposes of interest on the Tax-Exempt Bonds and the refunded bonds.

Series Dated Date Maturities Payment Date Amount 1990I June 1, 1990 August 15, 2028 August 15, 2005 $ 1,640,000(1) 1991B December 20, 1990 June 1, 2007 (8.250%) June 1, 2007 17,050,000(1) June 1, 2008 (7.400%) June 1, 2008 19,950,000(2) 1992D February 1, 1992 February 1, 2007 (CAB) February 1, 2007 10,820,000(1) 1994A August 2, 1993 August 1, 2005 (CAB) August 1, 2005 520,000(1) 1994H April 12, 1994 August 1, 2007 August 1, 2005 2,020,000(1) 1996B August 14, 1995 August 15, 2007 August 15, 2007 3,930,000(1) 1996F January 9, 1996 February 1, 2008 February 1, 2008 2,340,000(1) 1996G January 9, 1996 February 1, 2006 February 1, 2006 1,110,000(1) February 1, 2009 February 1, 2009 1,915,000(1) February 1, 2020 February 1, 2006 12,030,000(1)(3) 1996I March 14, 1996 March 15, 2018 March 15, 2006 775,000(2)(3) March 15, 2022 March 15, 2006 125,000(2)(3) 1996J February 15, 1996 February 15, 2007 February 15, 2006 120,000(1) February 15, 2019 February 15, 2006 875,000(1)(3) February 15, 2024 February 15, 2006 730,000(1)(3) 1997C August 15, 1996 February 1, 2022 August 1, 2006 815,000(1)(3) 1997D August 15, 1996 November 1, 2006 November 1, 2006 8,430,000(1) 1997E November 21, 1996 August 1, 2005 (5.000%) August 1, 2005 3,075,000(1) August 1, 2016 August 1, 2006 4,230,000(1)(3) August 1, 2026 August 1, 2006 4,745,000(1)(3) 1997F November 21, 1996 August 1, 2005 August 1, 2005 400,000(1) August 1, 2016 August 1, 2006 7,070,000(1)(3) August 1, 2024 August 1, 2006 9,295,000(1)(3) 1997G January 7, 1997 October 15, 2009 October 15, 2007 1,140,000(2) 1997H January 28, 1997 August 1, 2009 (5.375%) August 1, 2007 15,000(1) 1997I April 24, 1997 April 15, 2027 April 15, 2007 3,935,000(2)(3) 1997L June 10, 1997 August 1, 2005 (5.450%) August 1, 2005 60,000(1) August 1, 2009 August 1, 2007 6,720,000(1) 1997M June 10, 1997 June 1, 2027 June 1, 2007 120,000(1)(3) 1998B July 15, 1997 August 1, 2020 August 1, 2007 500,000(1)(3) 1998C November 18, 1997 November 15, 2005 November 15, 2005 150,000(1) November 15, 2010 November 15, 2007 195,000(1)

C-1 Series Dated Date Maturities Payment Date Amount November 15, 2021 November 15, 2007 $ 2,060,000(1)(3) November 15, 2027 November 15, 2007 3,055,000(1)(3) 1998D November 18, 1997 August 1, 2017 August 1, 2007 85,000(1)(3) August 1, 2021 August 1, 2007 5,785,000(1)(3) 1998E January 6, 1998 February 1, 2010 February 1, 2008 70,000(1) February 1, 2011 February 1, 2008 70,000(1) 1998F January 6, 1998 August 1, 2010 February 1, 2008 380,000(1) August 1, 2011 February 1, 2008 150,000(1) August 1, 2019 February 1, 2008 295,000(1)(3) 1998H April 1, 1998 August 1, 2005 (5.000%) August 1, 2005 1,305,000(1) 1998I June 11, 1998 May 15, 2012 May 15, 2008 1,540,000(1) May 15, 2013 May 15, 2008 970,000(1) May 15, 2014 May 15, 2008 465,000(1) 1998J June 1, 1998 August 1, 2006 (5.000%) August 1, 2006 900,000(1) 1999C August 20, 1998 August 15, 2010 August 15, 2008 800,000(1) 1999D August 20, 1998 August 1, 2006 August 1, 2006 470,000(1) 1999H March 18, 1999 March 15, 2011 (5.250%) March 15, 2009 6,705,000(1) March 15, 2012 (5.250%) March 15, 2009 7,325,000(1) March 15, 2013 (5.250%) March 15, 2009 5,910,000(1) March 15, 2014 (5.250%) March 15, 2009 6,700,000(1) March 15, 2015 (5.250%) March 15, 2009 80,000(1) March 15, 2016 (5.250%) March 15, 2009 85,000(1) 1999I April 21, 1999 April 15, 2013 April 15, 2009 3,025,000(1) April 15, 2014 April 15, 2009 3,180,000(1) April 15, 2015 April 15, 2009 5,610,000(1) April 15, 2016 April 15, 2009 95,000(1) 1999J June 15, 1999 May 15, 2015 May 15, 2009 5,120,000(2) May 15, 2016 May 15, 2009 11,130,000(1) 2000A June 1, 2000 May 15, 2012 May 15, 2010 50,000(1) May 15, 2024 May 15, 2010 13,370,000(1)(3) May 15, 2025 May 15, 2010 1,760,000(1) May 15, 2026 May 15, 2010 3,310,000(1)(3) May 15, 2030 May 15, 2010 105,000(1)(3) 2001C October 10, 2000 August 1, 2016 August 1, 2010 155,000(1) August 1, 2021 August 1, 2010 245,000(1) 2002A November 1, 2001 November 1, 2005 (3.500%) November 1, 2005 3,030,000(1) November 1, 2005 (5.000%) November 1, 2005 295,000(1) 2002B December 20, 2001 December 1, 2022 December 1, 2011 365,000(1) 2002C March 21, 2002 March 15, 2019 (5.625%) March 15, 2012 10,135,000(1) March 15, 2027 March 15, 2012 1,330,000(1)(3) 2002D June 3, 2002 June 1, 2020 (5.875%) June 1, 2012 1,055,000(1) 2002G June 3, 2002 August 1, 2008 (5.250%) August 1, 2008 5,605,000(1) August 1, 2019 August 1, 2012 7,300,000(1)

(1) The amount shown is being defeased and is a portion of the bonds of this description. (2) The amount shown is being defeased and is all of the bonds of this description except those, if any, that have been previously defeased. (3) The defeased bonds will be credited against the following redemption dates:

C-2 1996G 1996I 2020 Term Bond 2018 Term Bond February 1 Amount March 15 Amount 2018 $8,655,000 2017 $305,000 2020 3,375,000 2018 470,000

1996I 1996J 2022 Term Bond 2019 Term Bond March 15 Amount February 15 Amount 2020 $45,000 2017 $345,000 2021 45,000 2018 530,000 2022 35,000

1996J 1997C 2024 Term Bond 2022 Term Bond February 15 Amount February 1 Amount 2021 $230,000 2018 $815,000 2024 500,000

1997E 1997E 2016 Term Bond 2026 Term Bond August 1 Amount August 1 Amount 2016 $4,230,000 2022 $4,745,000

1997F 1997F 2016 Term Bond 2024 Term Bond August 1 Amount August 1 Amount 2016 $7,070,000 2020 $2,280,000 2021 7,015,000

1997I 1997M 2027 Term Bond 2027 Term Bond April 15 Amount June 1 Amount 2019 $ 655,000 2023 $35,000 2020 125,000 2024 25,000 2025 1,160,000 2026 30,000 2027 1,995,000 2027 30,000

1998B 1998C 2020 Term Bond 2021 Term Bond August 1 Amount November 15 Amount 2020 $500,000 2021 $2,060,000

1998C 1998D 2027 Term Bond 2017 Term Bond November 15 Amount August 1 Amount 2022 $1,675,000 2016 $85,000 2027 1,380,000

C-3 1998D 1998F 2021 Term Bond 2019 Term Bond August 1 Amount August 1 Amount 2020 $5,785,000 2018 $295,000

2000A 2000A 2024 Term Bond 2026 Term Bond May 15 Amount May 15 Amount 2023 $ 3,350,000 2025 $ 695,000 2024 10,020,000 2026 2,615,000

2000A 2002C 2030 Term Bond 2027 Term Bond May 15 Amount March 15 Amount 2028 $105,000 2026 $1,330,000

C-4 APPENDIX D BOND INSURERS The following information pertaining to Ambac Assurance Corporation (‘‘Ambac Assurance’’), Financial Security Assurance Inc. (‘‘FSA’’) and MBIA Insurance Corporation (‘‘MBIA’’) has been supplied by Ambac Assurance, FSA and MBIA. The City makes no representation as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the dates indicated. Summaries of or references to the insurance polices to be issued by Ambac Assurance, FSA and MBIA are made subject to all the detailed provisions thereof to which reference is hereby made for further information and do not purport to be complete statements of any or all such provisions. See ‘‘APPENDIX E—SPECIMEN INSURANCE POLICIES.’’ Ambac Assurance Ambac Assurance Corporation has made a commitment to issue a Financial Guaranty Insurance Policy relating to the Series O Bonds maturing in 2027 (the ‘‘Ambac Insured Bonds’’), effective as of the date of issuance of the Ambac Insured Bonds. Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New York, New York, New York or any successor thereto (the ‘‘Insurance Trustee’’) that portion of the principal of and interest on the Ambac Insured Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defined in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Fiscal Agent. The insurance will extend for the term of the Ambac Insured Bonds and, once issued, cannot be cancelled by Ambac Assurance. The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates, in case of principal, and on stated dates for payment, in case of interest. If the Ambac Insured Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Insured Bonds, Ambac Assurance will remain obligated to pay principal of and interest on outstanding Ambac Insured Bonds on the originally scheduled interest and principal payment dates. In the event of any acceleration of the principal of the Ambac Insured Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been acceleration. In the event the Fiscal Agent has notice that any payment of principal of or interest on an Ambac Insured Bond which has become Due for Payment and which is made to a Bondholder by or on behalf of the City has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty Insurance Policy does not cover: 1. payment on acceleration, as a result of a call for redemption or as a result of any other advancement of maturity. 2. payment of any redemption, prepayment or acceleration premium. 3. nonpayment of principal or interest caused by the insolvency or negligence of the Trustee, Paying Agent or Bond Registrar, if any. If it becomes necessary to call upon the Financial Guaranty Insurance Policy, payment of principal requires surrender of Ambac Insured Bonds to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Ambac Insured Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Bondholder entitlement to interest payments and an appropriate assignment of the Bondholder’s right to payment to Ambac Assurance.

D-1 Upon payment of the insurance benefits, Ambac Assurance will become the holder of the Ambac Insured Bonds, appurtenant coupon, if any, or right to payment of principal or interest on such Ambac Insured Bonds and will be fully subrogated to the surrendering Bondholder’s rights to payment. The insurance provided by the Financial Guaranty Insurance Policy is not covered by the property/casualty insurance security fund specified by the insurance laws of the State of New York.

Ambac Assurance Corporation Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, with admitted assets of approximately $8,585,000,000 (unaudited) and statutory capital of approximately $5,251,000,000 (unaudited) as of March 31, 2005. Statutory capital consists of Ambac Assurance’s policyholders’ surplus and statutory contingency reserve. Standard & Poor’s Credit Markets Services, a Division of The McGraw-Hill Companies, Moody’s Investors Service and Fitch Ratings have assigned a triple-A financial strength rating to Ambac Assurance. Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Ambac Insured Bonds. Ambac Assurance makes no representation regarding the Ambac Insured Bonds or the advisability of investing in the Ambac Insured Bonds and makes no representation regarding, nor has it participated in the preparation of, this Official Statement other than the information supplied by Ambac Assurance and presented in this Appendix D.

Available Information The parent company of Ambac Assurance, Ambac Financial Group, Inc. (‘‘Ambac Financial’’), is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the ‘‘SEC’’). These reports, proxy statements and other information can be read and copied at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC, including Ambac Financial. These reports, proxy statements and other information can also be read at the offices of the New York Stock Exchange, Inc. (the ‘‘NYSE’’), 20 Broad Street, New York, New York 10005. Copies of Ambac Assurance’s financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance’s administrative offices and its telephone number are One State Street Plaza, 19th Floor, New York, New York, 10004 and (212) 668-0340.

Incorporation of Certain Documents by Reference The following documents filed by Ambac Financial with the SEC (File No. 1-10777) are incorporated by reference in this Official Statement: 1. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and filed on March 15, 2005; 2. The Company’s Current Report on Form 8-K dated April 5, 2005 and filed on April 11, 2005; 3. The Company’s Current Report on Form 8-K dated and filed on April 20, 2005;

D-2 4. The Company’s Current Report on Form 8-K dated May 3, 2005 and filed on May 5, 2005; and 5. The Company’s Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 2005 and filed on May 10, 2005. All documents subsequently filed by Ambac Financial pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in ‘‘—Available Information.’’

FSA Concurrently with the issuance of the Bonds, FSA will issue its Municipal Bond Insurance Policy (the ‘‘Policy’’) for the Series O Bonds maturing in 2016 (5% coupon, 3.76% yield), 2017, 2018 and 2019 (5% coupon, 3.94% yield) (the ‘‘FSA Insured Bonds’’). The Policy guarantees the scheduled payment of principal of and interest on the Insured Bonds when due as set forth in the form of the Policy included as APPENDIX E to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law.

Financial Security Assurance Inc. FSA is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. (‘‘Holdings’’). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian corporation, and of Dexia Credit Local, a direct wholly-owned subsidiary of Dexia, S.A. Dexia, S.A., through its bank subsidiaries, is primarily engaged in the business of public finance, banking and asset management in France, Belgium and other European countries. No shareholder of Holdings or FSA is liable for the obligations of FSA. At March 31, 2005, FSA’s total policyholders’ surplus and contingency reserves were approximately $2,321,918,000 and its total unearned premium reserve was approximately $1,672,672,000 in accordance with statutory accounting practices. At March 31, 2005, FSA’s total shareholder’s equity was approxi- mately $2,726,667,000 and its total net unearned premium reserve was approximately $1,356,678,000 in accordance with generally accepted accounting principles. The financial statements included as exhibits to the annual and quarterly reports filed by Holdings with the Securities and Exchange Commission are hereby incorporated herein by reference. Also incorporated herein by reference are any such financial statements so filed from the date of this Official Statement until the termination of the offering of the FSA Insured Bonds. Copies of materials incorporated by reference will be provided upon request to Financial Security Assurance Inc.: 350 Park Avenue, New York, New York 10022, Attention: Communications Department (telephone (212) 826-0100). The Policy does not protect investors against changes in market value of the FSA Insured Bonds, which market value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. FSA makes no representation regarding the FSA Insured Bonds or the advisability of investing in the FSA Insured Bonds. FSA makes no representation regarding the Official Statement, nor has it participated in the preparation thereof, except that FSA has provided to the City the information presented under this caption for inclusion in the Official Statement.

MBIA MBIA has made a commitment to issue a financial guaranty insurance policy (the ‘‘Policy’’) relating to the Series P Bonds maturing in 2014, 2015, 2016 and 2018 and the Series Q Bonds maturing in 2014 through 2016 (the ‘‘MBIA Insured Bonds’’) effective as of the date of issuance of the MBIA Insured Bonds. MBIA’s policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the City to the Paying Agent or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the MBIA Insured Bonds as such payments shall become due but

D-3 shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by MBIA’s policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner of the MBIA Insured Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law (a ‘‘Preference’’). MBIA’s policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any MBIA Insured Bond. MBIA’s policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of the MBIA Insured Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. MBIA’s policy also does not insure against nonpayment of principal of or interest on the MBIA Insured Bonds resulting from the insolvency, negligence or any other act or omission of the Paying Agent or any other paying agent for the MBIA Insured Bonds. Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by MBIA from the Paying Agent or any owner of a MBIA Insured Bond the payment of an insured amount for which is then due, that such required payment has not been made, MBIA on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such MBIA Insured Bonds or presentment of such other proof of ownership of the MBIA Insured Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the MBIA Insured Bonds as are paid by MBIA, and appropriate instruments to effect the appointment of MBIA as agent for such owners of the MBIA Insured Bonds in any legal proceeding related to payment of insured amounts on the MBIA Insured Bonds, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners or the Paying Agent payment of the insured amounts due on such MBIA Insured Bonds, less any amount held by the Paying Agent for the payment of such insured amounts and legally available therefor.

MBIA Insurance Corporation MBIA is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the ‘‘Company’’). The Company is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. MBIA has three branches, one in the Republic of France, one in the Republic of Singapore and one in the Kingdom of Spain. New York has laws prescribing minimum capital requirements, limiting classes and concentrations of investments and requiring the approval of policy rates and forms. State laws also regulate the amount of both the aggregate and individual risks that may be insured, the payment of dividends by MBIA, changes in control and transactions among affiliates. Additionally, MBIA is required to maintain contingency reserves on its liabilities in certain amounts and for certain periods of time. MBIA does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Policy and MBIA set forth in this Appendix D or in Appendix E. Additionally, MBIA makes no representation regarding the MBIA Insured Bonds or the advisability of investing in the MBIA Insured Bonds. The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

D-4 MBIA Information The following documents filed by the Company with the Securities and Exchange Commission (the ‘‘SEC’’) are incorporated herein by reference: (1) The Company’s Annual Report on Form 10-K for the year ended December 31, 2004; and (2) The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.

Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of this Official Statement and prior to the termination of the offering of the MBIA Insured Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the SEC filings (including (1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and (2) the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005) are available (i) over the Internet at the SEC’s web site at http://www.sec.gov; (ii) at the SEC’s public reference room in Washington D.C.; (iii) over the Internet at the Company’s web site at http://www.mbia.com; and (iv) at no cost, upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York 10504. The telephone number of MBIA is (914) 273-4545.

As of December 31, 2004, MBIA had admitted assets of $10.4 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $3.4 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of March 31, 2005 MBIA had admitted assets of $10.6 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $3.6 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

Financial Strength Ratings of MBIA

Moody’s Investors Service, Inc. rates the financial strength of MBIA ‘‘Aaa.’’

Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. rates the financial strength of MBIA ‘‘AAA.’’

Fitch Ratings rates the financial strength of MBIA ‘‘AAA.’’

Each rating of MBIA should be evaluated independently. The ratings reflect the respective rating agency’s current assessment of the creditworthiness of MBIA and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.

The above ratings are not recommendations to buy, sell or hold the MBIA Insured Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the MBIA Insured Bonds. MBIA does not guaranty the market price of the MBIA Insured Bonds nor does it guaranty that the ratings on the MBIA Insured Bonds will not be revised or withdrawn.

This policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

D-5 [THIS PAGE INTENTIONALLY LEFT BLANK.] APPENDIX E

SPECIMEN INSURANCE POLICIES

E-1 E-2 E-3 E-4 FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York 10504

Policy No. [NUMBER]

MBIA Insurance Corporation (the ‘‘Insurer’’), in consideration of the payment of the premium and subject to the terms of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to [PAYING AGENT/TRUSTEE] or its successor (the ‘‘Paying Agent’’) of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the ‘‘Insured Amounts.’’ ‘‘Obligations’’ shall mean:

[PAR] [LEGAL NAME OF ISSUE]

Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amount for which is then due, that such required payment bas not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assignment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts on the Obligations, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners, or the Paying Agent payment of the Insured Amounts due on such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation.

As used herein, the term ‘‘owner’’ shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such purpose. The term owner shall not include the Issuer or any party whose agreement with the Issuer constitutes the underlying security for the Obligations.

Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New York 10504 and such service of process shall be valid and binding.

This policy is non-cancellable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations.

E-5 This policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

IN WITNESS WHEREOF, the Insurer has caused this policy to be executed in facsimile on its behalf by its duly authorized officers, this [DAY] day of [MONTH, YEAR].

MBIA Insurance Corporation

President

AssistantSPECIMEN Secretary

E-6 APPENDIX F

SIDLEY AUSTIN BROWN & WOOD LLP

BEIJING 787 SEVENTH A VENUE LOS ANGELES

BRUSSELS N EW Y ORK, NEW Y ORK 10019 NEW YORK T ELEPHONE 212 839 5300 CHICAGO SAN FRANCISCO F ACSIMILE 212 839 5599 DALLAS www.sidley.com SHANGHAI

GENEVA F OUNDED 1866 SINGAPORE

HONG KONG TOKYO

LONDON WASHINGTON, D . C .

June 2, 2005

HONORABLE WILLIAM C. THOMPSON,JR. COMPTROLLER The City of New York Municipal Building New York, New York 10007 Dear Comptroller Thompson: We have acted as counsel to The City of New York (the ‘‘City’’), a municipal corporation of the State of New York (the ‘‘State’’), in the issuance of its General Obligation Bonds, Fiscal 2005 Series O, P and Q (the ‘‘Bonds’’). The Bonds are issued pursuant to the provisions of the Constitution of the State, the Local Finance Law of the State, and the Charter of the City, and in accordance with a certificate of the Deputy Comptroller for Public Finance and related proceedings (the ‘‘Certificate’’). Based on our examination of existing law, such legal proceedings and such other documents as we deem necessary to render this opinion, we are of the opinion that: 1. The Bonds have been duly authorized, executed and issued in accordance with the Constitution and statutes of the State and the Charter of the City and constitute valid and legally binding obligations of the City for the payment of which the City has validly pledged its faith and credit, and all real property within the City subject to taxation by the City is subject to the levy by the City of ad valorem taxes, without limit as to rate or amount, for payment of the principal of and interest on the Bonds. 2. Interest on the Bonds is exempt from personal income taxes imposed by the State or any political subdivision thereof, including the City. 3. Except as provided in the following sentence, interest on the Series O Bonds maturing in the years 2007 through 2012, 2013 through 2015 (each a 5% coupon) and 2016 through 2035, the Series P Bonds, and the Series Q Bonds maturing in the years 2005 (4% coupon), 2006 (31⁄2% coupon), 2007 (23⁄4% coupon) and 2008 through 2016 (the ‘‘Tax-Exempt Bonds’’) is not includable in the gross income of the owners of the Tax-Exempt Bonds for purposes of federal income taxation under existing law. Interest on the Tax-Exempt Bonds will be includable in the gross income of the owners thereof retroactive to the date of issue of the Tax-Exempt Bonds in the event of a failure by the City to comply with the applicable requirements of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), and the covenants regarding use, expenditure and investment of bond proceeds and the timely payment of certain investment earnings to the United States Treasury; and we render no opinion as to the exclusion from gross income of interest on the Tax-Exempt Bonds for federal income tax purposes on or after the date on which any action is taken under the Certificate upon the approval of counsel other than ourselves.

SIDLEY AUSTIN BROWN & WOOD LLP IS A DELAWARE LIMITED LIABILITY PARTNERSHIP PRACTICING IN AFFILIATION WITH OTHER SIDLEY AUSTIN BROWN & WOOD PARTNERSHIPS

F-1 4. Interest on the Tax-Exempt Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum tax. The Code contains other provisions that could result in tax consequences, upon which we render no opinion, as a result of ownership of such Bonds or the inclusion in certain computations (including without limitation those related to the corporate alternative minimum tax) of interest that is excluded from gross income.

5. The excess, if any, of the amount payable at maturity of any maturity of the Tax-Exempt Bonds over the initial offering price of such Bonds to the public at which price a substantial amount of such maturity is sold represents original issue discount which is excluded from gross income for federal income tax purposes to the same extent as interest on the Tax-Exempt Bonds. The Code further provides that such original issue discount excluded as interest accrues in accordance with a constant interest method based on the compounding of interest, and that a holder’s adjusted basis for purposes of determining a holder’s gain or loss on disposition of Tax-Exempt Bonds with original issue discount will be increased by the amount of such accrued interest.

The rights of the owners of the Bonds and the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted, to the extent constitutionally applicable, and the enforcement of related contractual and statutory covenants of the City and the State may also be subject to the exercise of the State’s police powers and of judicial discretion in appropriate cases.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions. Such opinions may be adversely affected by actions taken or events occurring, including a change in law, regulation or ruling (or in the application or official interpretation of any law, regulation or ruling) after the date hereof. We have not undertaken to determine, or to inform any person, whether such actions are taken or such events occur and we have no obligation to update this opinion in light of such actions or events.

Very truly yours,

F-2